Beneficiary Designation Example

Dawn Douglas knows that upon her death she would like to leave $25,000 to her favorite nephew and $25,000 to Medical Teams International. Let’s assume that upon her death, her assets include shares of stock worth $25,000 and an individual retirement account (IRA) worth $25,000.

Due to the fact Medical Teams International is a tax-exempt organization, we will pay no tax regardless of which of the two assets Dawn leaves to us. What does matter, however, is how much tax her favorite nephew will have to pay on the asset she leaves to him.

It is better for her to leave the stock to her nephew and to designate Medical Teams International as the beneficiary of the IRA. This is because the nephew will inherit the stock at a stepped-up cost basis (its value on the date of Dawn’s death) and will pay no income tax on the stock (unless he later sells it at a gain). Medical Teams International, as a tax-exempt entity, will pay no income tax on what it receives from the IRA.

If Dawn’s nephew were designated as the beneficiary of the IRA, he would likely have to pay income tax on every dollar distributed to him from the IRA.

If you have questions, please contact Linda Ranz at 425.284.1941 or lranz@medicalteams.org.