Should You Consider Leaving Your IRA to Charity?

By Clifton Linton
Senior Writer, mPower

In This Story Why Give? Before You Give How to Give One Easy Solution

One board member of the charitable foundation that supports the University of California, Los Angeles (UCLA) believes in putting his money where his mouth is. He's donating his IRA to the University.

Each time he receives his annual distribution of approximately $50,000, he makes a gift to the University in that amount, said Judith Pillon, director of gift planning for The UCLA Foundation. And, it's a gift that should keep on giving after he's gone because he named the Foundation as the beneficiary of his IRA.

minute: read this article at a glance.

Technical Terms Life expectancy Required beginning date Required minimum distribution (RMD)

Pillon says that one of the best potential sources of donations she sees are the IRA accounts that workers have been building up over their working lives. In the solicitation literature the Foundation sends to potential donors, "we always mention qualified retirement plans," she said.

In 1999, the last year statistics were available, the Federal Reserve Board estimated that total assets held in IRAs would reach $2.4 trillion. Of course, not everyone can afford to donate IRA money to charity. What's more, not everyone is aware that this is even possible. According to Giving USA, in 1999, Americans donated about $190 billion to charity.

If you decide that donating your estate assets to charity upon your death is a good strategy for you, you can accomplish two things — doing a good deed and reducing the tax liability of your estate. But, you need to be aware of a few beneficiary naming rules in order to make sure that the charity gets the most out of your gift.

Why Give?

Aside from the warm and fuzzy feeling you may get from giving, there's another reason to donate — for the tax break.

You may want to leave the balance of your IRA to your heirs upon your death, but keep in mind that taxes, both estate and income, can whittle down your legacy. Depending on the size of your estate, your heirs could lose up to 80 percent of the value of the IRA to estate and income taxes, says Timothy Sharpe, executive vice president with Robert F. Sharpe & Co. Inc., a consulting firm to the charity industry.

Here's why: Assets held in an IRA are subject to both estate and income taxes. If your estate, including your IRA, is worth more than $675,000, it will be subject to estate taxes, starting at a 39 percent rate. In addition, your heirs will owe income tax on money withdrawn from a traditional IRA. (This article only discusses traditional IRAs with pretax contributions; Roth IRAs are not subject to income tax.)

That's where a charitable donation of your IRA comes in. Your heirs won't have to pay income tax on an IRA given to charity. The donation can also be listed as a charitable deduction by the estate, thus reducing your estate's size and potential tax liability.

Additionally, your heirs don't have to pay income or capital gains taxes on probated assets such as stock, houses, cars and so on. The reason is that heirs can take advantage of what is known as a "step-up" provision that works as follows:

Say you had shares of a stock that had greatly appreciated. If you sold them before death, you might have to pay a huge capital gains tax. If your heirs inherit those shares, all they pay is the estate tax. The reason is that the IRS will allow them to revalue the shares at current prices.

Law professor Christopher Hoyt at the University of Missouri-Kansas City, offers a strategy to consider as you develop your charitable giving plan. "Give the stuff to charity that is taxable for your kids, and the stuff that isn't to your kids," he said.

Here's how to do it:

Can't Afford Money? How about Your Time? There's one commodity that retirees generally have plenty of, and charities also need: time. If you can't afford to donate money to charity, how about giving your time? It's not tax-deductible, but most charities have a myriad of tasks that could be ideal for retirees, from stuffing envelopes to spending time with people who benefit from the charity's good works.

• While you're alive, give charities gifts of assets subject to capital gains taxes, like stock. You can deduct the gifts from your taxes and help offset other taxable income, such as IRA required minimum distributions.
• At death, give the IRA to the charity. There is no income tax bill for your heirs for the IRA and they can use the step-up provision for other assets in your probate estate.

Before You Give

Before giving your money away, make sure your family and heirs are taken care of.

When a client says he wants to give his IRA to charity, Certified Financial Planner Dennis DeStefano asks whether he can really afford to do so. "Sometimes (clients) talk about giving and don't have enough assets to begin with," he said.

The only time you should name a charity as the primary beneficiary is when you no longer expect to need the money either for your own retirement or to pass on to heirs, DeStefano says.

How to Give

Required Beginning Date By April 1 of the year after reaching the age of 70½, IRA holders are required to name a beneficiary and select a method of calculating life expectancy. This is a critical date because the choices that are on record with your custodian then are irrevocable. These factors are used to create a formula that dictates how your IRA balance will be distributed. For instance, a woman might name her husband as her IRA beneficiary and she could use his life expectancy along with hers to help stretch out her IRA payments.

Using an IRA to give money to charity could be easier and less costly than setting up intricate trust agreements. However, if you have a complex estate-planning situation, you should contact an estate-planning attorney.

Most commonly, IRAs donated to charity come from a single elderly spouse, says Anthony Anchukaitis, certified public accountant with Canby Maloney & Co. "I think most of the time, the spouse is the (IRA) beneficiary," he said.

There are a couple of key rules married couples need to know.

Name the charity as secondary beneficiary: There is a downside to naming a charity as your primary beneficiary.

"People have to be aware that naming a charity as a primary beneficiary, by default, means they are electing a single life expectancy election, as opposed to a double life with a longer distribution," said Eric Donner, president and CEO of Metuchen, N.J.-based RDS, a maker of retirement distribution software.

That's because a charity is a corporate entity and has a zero life expectancy. Therefore, you will only be able to use a single life expectancy to calculate your payment stream. Consequently, you will have to draw down your IRA balance more quickly than if you calculated your distributions using two life expectancies. To avoid this, name the charity as a contingent beneficiary.

Disclaimer Strategy Disclaiming an IRA benefit isn't hard, but it must be done correctly, cautions law professor Christopher Hoyt at the University of Missouri-Kansas City. Basically, you need to file the disclaimer in writing within nine months of the benefactor's death, he said. Otherwise, the IRA will become the property of the primary beneficiary. Check with a knowledgeable attorney to be sure you do this correctly.

If your spouse is your primary beneficiary, he or she will receive the IRA after you die. He or she in turn can name a child as the beneficiary for the purposes of extending the IRA payments. When your spouse dies, your child can disclaim the benefit and the IRA balance will go to the charity. However, if you don't trust your children to follow your wishes, this might not be a good strategy, Donner adds.

Make sure the charity is named as an IRA beneficiary: Be sure to name the charity on your IRA beneficiary form. IRA assets are only distributed to the beneficiaries you select — you can't direct IRA assets through your will. If you leave the beneficiary selection blank, the IRA balance will automatically become part of your estate. That creates a taxable event for your estate and the charity will have to pay the income tax due on the IRA withdrawals. Ultimately, the charity will get a smaller donation.

If you name the charity as a beneficiary, the money flows directly to the charity and no income tax will be due.

One Easy Solution

Related Reading Avoid Expensive Mistakes When Making IRA Beneficiary, Distribution Choices Is Naming a Charity as Your 401(k) Plan Beneficiary a Good Idea?

One relatively easy solution Donner offers is to split your IRA before you reach your required beginning date. Create two IRAs: one containing the money you intend to leave to your spouse and heirs and another containing the money you intend to leave to charity.

In this case, you don't have to worry about choosing the correct beneficiary and method of calculating life expectancies — all the money in the second IRA will go to charity. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Should You Consider Leaving Your IRA to Charity?

By Clifton Linton
Senior Writer, mPower

In This Story Why Give? Before You Give How to Give One Easy Solution

One board member of the charitable foundation that supports the University of California, Los Angeles (UCLA) believes in putting his money where his mouth is. He's donating his IRA to the University.

Each time he receives his annual distribution of approximately $50,000, he makes a gift to the University in that amount, said Judith Pillon, director of gift planning for The UCLA Foundation. And, it's a gift that should keep on giving after he's gone because he named the Foundation as the beneficiary of his IRA.

minute: read this article at a glance.

Technical Terms Life expectancy Required beginning date Required minimum distribution (RMD)

Pillon says that one of the best potential sources of donations she sees are the IRA accounts that workers have been building up over their working lives. In the solicitation literature the Foundation sends to potential donors, "we always mention qualified retirement plans," she said.

In 1999, the last year statistics were available, the Federal Reserve Board estimated that total assets held in IRAs would reach $2.4 trillion. Of course, not everyone can afford to donate IRA money to charity. What's more, not everyone is aware that this is even possible. According to Giving USA, in 1999, Americans donated about $190 billion to charity.

If you decide that donating your estate assets to charity upon your death is a good strategy for you, you can accomplish two things — doing a good deed and reducing the tax liability of your estate. But, you need to be aware of a few beneficiary naming rules in order to make sure that the charity gets the most out of your gift.

Why Give?

Aside from the warm and fuzzy feeling you may get from giving, there's another reason to donate — for the tax break.

You may want to leave the balance of your IRA to your heirs upon your death, but keep in mind that taxes, both estate and income, can whittle down your legacy. Depending on the size of your estate, your heirs could lose up to 80 percent of the value of the IRA to estate and income taxes, says Timothy Sharpe, executive vice president with Robert F. Sharpe & Co. Inc., a consulting firm to the charity industry.

Here's why: Assets held in an IRA are subject to both estate and income taxes. If your estate, including your IRA, is worth more than $675,000, it will be subject to estate taxes, starting at a 39 percent rate. In addition, your heirs will owe income tax on money withdrawn from a traditional IRA. (This article only discusses traditional IRAs with pretax contributions; Roth IRAs are not subject to income tax.)

That's where a charitable donation of your IRA comes in. Your heirs won't have to pay income tax on an IRA given to charity. The donation can also be listed as a charitable deduction by the estate, thus reducing your estate's size and potential tax liability.

Additionally, your heirs don't have to pay income or capital gains taxes on probated assets such as stock, houses, cars and so on. The reason is that heirs can take advantage of what is known as a "step-up" provision that works as follows:

Say you had shares of a stock that had greatly appreciated. If you sold them before death, you might have to pay a huge capital gains tax. If your heirs inherit those shares, all they pay is the estate tax. The reason is that the IRS will allow them to revalue the shares at current prices.

Law professor Christopher Hoyt at the University of Missouri-Kansas City, offers a strategy to consider as you develop your charitable giving plan. "Give the stuff to charity that is taxable for your kids, and the stuff that isn't to your kids," he said.

Here's how to do it:

Can't Afford Money? How about Your Time? There's one commodity that retirees generally have plenty of, and charities also need: time. If you can't afford to donate money to charity, how about giving your time? It's not tax-deductible, but most charities have a myriad of tasks that could be ideal for retirees, from stuffing envelopes to spending time with people who benefit from the charity's good works.

• While you're alive, give charities gifts of assets subject to capital gains taxes, like stock. You can deduct the gifts from your taxes and help offset other taxable income, such as IRA required minimum distributions.
• At death, give the IRA to the charity. There is no income tax bill for your heirs for the IRA and they can use the step-up provision for other assets in your probate estate.

Before You Give

Before giving your money away, make sure your family and heirs are taken care of.

When a client says he wants to give his IRA to charity, Certified Financial Planner Dennis DeStefano asks whether he can really afford to do so. "Sometimes (clients) talk about giving and don't have enough assets to begin with," he said.

The only time you should name a charity as the primary beneficiary is when you no longer expect to need the money either for your own retirement or to pass on to heirs, DeStefano says.

How to Give

Required Beginning Date By April 1 of the year after reaching the age of 70½, IRA holders are required to name a beneficiary and select a method of calculating life expectancy. This is a critical date because the choices that are on record with your custodian then are irrevocable. These factors are used to create a formula that dictates how your IRA balance will be distributed. For instance, a woman might name her husband as her IRA beneficiary and she could use his life expectancy along with hers to help stretch out her IRA payments.

Using an IRA to give money to charity could be easier and less costly than setting up intricate trust agreements. However, if you have a complex estate-planning situation, you should contact an estate-planning attorney.

Most commonly, IRAs donated to charity come from a single elderly spouse, says Anthony Anchukaitis, certified public accountant with Canby Maloney & Co. "I think most of the time, the spouse is the (IRA) beneficiary," he said.

There are a couple of key rules married couples need to know.

Name the charity as secondary beneficiary: There is a downside to naming a charity as your primary beneficiary.

"People have to be aware that naming a charity as a primary beneficiary, by default, means they are electing a single life expectancy election, as opposed to a double life with a longer distribution," said Eric Donner, president and CEO of Metuchen, N.J.-based RDS, a maker of retirement distribution software.

That's because a charity is a corporate entity and has a zero life expectancy. Therefore, you will only be able to use a single life expectancy to calculate your payment stream. Consequently, you will have to draw down your IRA balance more quickly than if you calculated your distributions using two life expectancies. To avoid this, name the charity as a contingent beneficiary.

Disclaimer Strategy Disclaiming an IRA benefit isn't hard, but it must be done correctly, cautions law professor Christopher Hoyt at the University of Missouri-Kansas City. Basically, you need to file the disclaimer in writing within nine months of the benefactor's death, he said. Otherwise, the IRA will become the property of the primary beneficiary. Check with a knowledgeable attorney to be sure you do this correctly.

If your spouse is your primary beneficiary, he or she will receive the IRA after you die. He or she in turn can name a child as the beneficiary for the purposes of extending the IRA payments. When your spouse dies, your child can disclaim the benefit and the IRA balance will go to the charity. However, if you don't trust your children to follow your wishes, this might not be a good strategy, Donner adds.

Make sure the charity is named as an IRA beneficiary: Be sure to name the charity on your IRA beneficiary form. IRA assets are only distributed to the beneficiaries you select — you can't direct IRA assets through your will. If you leave the beneficiary selection blank, the IRA balance will automatically become part of your estate. That creates a taxable event for your estate and the charity will have to pay the income tax due on the IRA withdrawals. Ultimately, the charity will get a smaller donation.

If you name the charity as a beneficiary, the money flows directly to the charity and no income tax will be due.

One Easy Solution

Related Reading Avoid Expensive Mistakes When Making IRA Beneficiary, Distribution Choices Is Naming a Charity as Your 401(k) Plan Beneficiary a Good Idea?

One relatively easy solution Donner offers is to split your IRA before you reach your required beginning date. Create two IRAs: one containing the money you intend to leave to your spouse and heirs and another containing the money you intend to leave to charity.

In this case, you don't have to worry about choosing the correct beneficiary and method of calculating life expectancies — all the money in the second IRA will go to charity. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.