Author: Mark L. Brasee
Have you considered making a charitable Individual Retirement Account (“IRA”) gift a part of your estate plan? There are considerable advantages for donating retirement assets to a charity in your Estate plan, for both the heirs and Estate of the donor, and for charitable organizations. The donor’s Estate will benefit by not needing to pay income or estate taxes on the distribution of the assets. Additionally, the charity will benefit because the entire retirement account amount will go directly to them, since they do not pay income or estate taxes on the distribution.
Since an IRA can be subject to both income and estate taxes, giving IRAs to charities may be a wise strategy, and may free up other assets to give the heirs of your Estate. IRAs are considered Income in Respect of a Decedent (“IRD”). IRD is inherited property that would have been taxable income if the person received it while alive. When IRD is received, the Estate or heir must pay income taxes on it. Therefore, a person’s heirs are often better off if the IRD is given to charity. It means a greater portion of the inheritance the heirs receive is income tax-free. Meanwhile, the charity, as a tax-exempt organization, can keep the entire amount without paying taxes on it.
What is the easiest way to ensure your retirement plan goes to a charity of your choice? First, you should name the charity as the beneficiary for your IRA. You can talk to your IRA plan advisor about the necessary beneficiary designation form. Then, you should be prepared to enter the charity’s full legal name, address, and tax identification number. Your IRA will be paid directly to the charity as the beneficiary, rather than your Estate. Typically, you’ll also need to indicate a percentage of the IRA account to be given to the charity. This can be 100%, or you can designate multiple beneficiaries of your IRA. However, if a charity is the beneficiary and the IRA owner dies before the required distribution date begins, the IRA must be fully distributed within five years. If you’d like to have multiple IRA beneficiaries, you may want to divide the IRA, naming the charity the sole beneficiary of one and an heir the sole beneficiary of the other. This allows your heir to take distributions over his or her life expectancy rather than in five years.
Ultimately, you should talk with your attorney to ensure that your IRA beneficiary also aligns with your overall Estate plan. An Estate gift of your IRA can be a tax-advantage way to create a lasting charitable legacy.
This article was originally written for/published by the Child Saving Institute and has been prepared for general information purposes. These article (1) does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney or tax professional. You should always seek qualified professional counsel on your specific matter prior to taking any action.
Mark L. Brasee