Avoiding Charitable IRA Beneficiary Mistakes

Avoiding Charitable IRA Beneficiary Mistakes

| April 13, 2016

Can Individual Retirement Arrangements/Accounts (IRAs) be used to benefit a charity? IRAs can be a great source of funds for your favorite charity, as long as you are careful to avoid some traps in order to transfer the most money to both the charity and your other IRA beneficiaries. Let’s walk through a few of these do’s and don’ts, and look at some examples of things to avoid.

First, you should name the charity directly on your beneficiary form. This way the money will go straight to the charity and avoid probate. When the charity receives the money it won’t be considered income to the estate of the deceased IRA owner. If you try to pass the money to the charity through your will, it will most likely go through probate and taxes before the charity receives it, if they ever do.

It can also be smart to set up a separate IRA just for the charity’s share. The idea is to separate living beneficiaries from non-living ones. If living, breathing beneficiaries inherit the same IRA as a charity, the stretch IRA for the living beneficiaries could be lost if the charity’s portion is not “cashed out” within the IRS ordained time frames. Would you like to avoid a potential problem later? Name the charity on a separate IRA!

Since charities are generally not subject to income tax, you may consider leaving tax deferred retirement plans to charities while leaving non-retirement assets to your heirs. Your heirs will end up with more, because the money they will inherit will not be subject to income tax, as the retirement plan would be.

Because charities do not pay income tax, do not convert assets to a Roth IRA that you plan to leave to a charity. Most charities are tax-exempt organizations. When an IRA goes to one of these charities, they don’t pay income tax like other beneficiaries would. So if you’re leaving your IRA to charity, why convert it to a Roth IRA and pay the tax - when the money will be tax free to the charity anyway? Don’t be that guy!

Lastly beware of naming a charity as a trust beneficiary. A charity does not have a life expectancy. Some trusts are called see-through (or look-through) trusts, and they allow the IRA of a deceased owner to be continued based on the trust beneficiary with the shortest life expectancy. Since a charity has no life expectancy, it can eliminate the stretch for the remaining trust beneficiaries.

These are just a few things to be aware of when making charities part of your estate plan. Have a great day!

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.