global Tax Can you Name a Charity as your IRA Beneficiary? November 17, 2022 Interested in donating your retirement plan assets to charity? We explore the process of naming a charity as your Individual Retirement Account (IRA) beneficiary here. If you’re charitably inclined, you might be hoping to designate a charity as your IRA beneficiary. This is certainly possible and can be very tax efficient. Here’s what you should know. Eligible Designated Beneficiaries—Important Background Information to Consider For important reminders around new rules for choosing beneficiaries, check out our blog, Who is Considered an Eligible Designated Beneficiary on an IRA? Essentially, The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 established the term “Eligible Designated Beneficiary” (EDP) to clarify who can inherit an IRA. This excerpt from the blog gives us an important reminder about the now-defunct “Stretch” IRA: The SECURE Act eliminated “Stretch” IRAs, so now inherited IRAs with non-spouse beneficiaries (i.e. children or grandchildren) must be withdrawn within 10 years versus the beneficiary utilizing their life expectancy tables, in effect ‘stretching the IRA’. There are no required distributions within that 10 year period, but by the end of the 10th year, the entire balance must be distributed. Can you still name a charity as beneficiary? Yes. You can name a charity as beneficiary of all or a percentage of your IRA. This can bring a variety of benefits, including: After your death, the charity can withdraw assets from the retirement account income tax free since charities are tax-exempt entities. Individuals named as beneficiaries, on the other hand, are required to pay income taxes at ordinary rates on any distributions they receive from the IRAAmounts left to a charity at death receive an estate tax charitable deduction—resulting in fewer applicable federal estate taxesNaming a charity as a beneficiary provides a way to support a cause that is important to you while also ensuring you have access to your money during your lifetime if you should need it. Although this method could be used to satisfy a pledge, simply naming a beneficiary is not the same as pledging funds, so there is no obligation to donate if you should end up needing the money. What is a charitable remainder trust (CRT)? If you’re worried about donating away your income streams during your lifetime, then naming a CRT as your IRA beneficiary is another option to consider. In this “split-interest” trust, the trustee pays the donor, or other named persons, an annual percentage of the income generated by the trust (also known as an annuity payment), for a pre-determined period. Once this period ends, which is either a max of 20 years or after the last named person dies, the property transfers to one or more charities. Similar to a charity, a CRT is tax-exempt during its existence, so the trust will not pay income taxes when it receives a payout from an IRA. Just like when you name the charity as the IRA beneficiary directly, the ultimate charity receives a greater donation since the money inside a CRT is still tax-free. The donor or named person will only owe income taxes on the annuity payments they receive. By contributing your IRA to a CRT upon your death, you have the ability to regain some of the benefits of the old “Stretch” IRA by having up to 20 years for your non-charitable beneficiaries of the CRT to benefit from the IRA funds, rather than the current max of 10 years for inherited IRAs. Questions on your options? We can help—contact us any time.
