If
you intend to make gifts to charities at your death, you might want to
consider using your IRA or other tax-deferred retirement plan to do so
as a means to enhance gifts to your beneficiaries.
When you designate an individual as a beneficiary of your
tax deferred (“tax-qualified”) retirement plan, the distribution to that
individual is subject to income tax liability at that person’s tax rate
– and the amount reaching the beneficiary’s pocket is reduced
accordingly. By contrast, when the beneficiary is a qualified,
tax-exempt charitable organization, the entire distribution from your
IRA goes to the charity. So, with careful planning, you may be able to
effectively increase the size of your estate available for your chosen
beneficiaries by removing the IRS as an unwanted “beneficiary” of a
portion of the tax-deferred funds.
For example, if A leaves a $5,000 IRA to her nephew and a
$5,000 bequest to her favorite charity, the total amount actually
received by these beneficiaries will be reduced by the amount the nephew
is required to pay in income taxes on distribution(s) from the IRA. If
instead A switches the assets and leaves a $5,000 bequest to her nephew
and the $5,000 IRA to the charity, the income tax related to IRA
distributions is eliminated, and the total amount received by A’s
beneficiaries is the full $10,000 of A’s assets. The income component --
and potential savings -- can be especially significant where a person’s
non-charitable beneficiary (A’s nephew) is in a high income tax
bracket. There may be state income tax savings as well.
Should You Name a Charity on Your IRA?
Naming a charitable organization as beneficiary of your IRA
should only be considered if you want to make charitable gifts.
You may instead want to leave all your assets to your spouse, or to your
children, or others
. And even if you want to make
charitable gifts, there may be reasons you want to leave your IRAs to
other beneficiaries. (For instance, in the example above, A may view the
IRA as a way to trigger her nephew’s interest in planning for his own
retirement.)
If you have decided to name a charity as a beneficiary, you
must next decide whether to name the charity as a primary or secondary
(“contingent”) beneficiary. For example, an IRA owner with a spouse will
likely want to make retirement benefits available to the spouse, but
may want to designate a charity as the contingent beneficiary in the
event the spouse predeceases the IRA owner.
The foregoing issues should be discussed with your estate planning attorney.
Still another question is whether you want to designate all
or just a portion of your IRA to the charity. If you designate only a
portion, care must be taken after the IRA owner's death to avoid
unfavorable tax consequences for the non-charitable beneficiaries. One
way to avoid worrying about this complication is to split your IRA into
separate IRAs for the charitable and non-charitable beneficiaries.
Keep in mind that you can change beneficiaries, including
charities, without having to change your other estate planning
documents.
What About Your Roth IRA?
The considerations raised in this article
do not
apply to Roth IRAs. Distributions from inherited Roth IRAs are
not income-taxable to individual beneficiaries. Traditional IRAs
and other retirement plans which consist of pre-tax contributions and
associated earnings are the only plans which are the subject of this
article.
Designating charities as beneficiaries of IRAs can be
an easy and estate-enhancing way to make your charitable gifts, if this
estate planning strategy is compatible with your overall estate
plan. Your estate planning attorney should be consulted to
evaluate whether this strategy is appropriate for your situation.
Caveat: IRS rules and regulations and retirement plan
administrators’ policies concerning retirement plan distributions are
complex, and there are a number of considerations for any particular
person making decisions regarding his or her retirement plan beneficiary
designations. This article provides generalizations only, and is
not intended to provide advice for any particular retirement plan
designation situation or decision. Please consult with your estate
planning attorney, and with your retirement plan administrator, with
respect to beneficiary designations for your tax-deferred retirement
plan benefits.
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