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Designating a Charity as a Beneficiary of an IRA after Death

Is it better to designate an individual or charity as a beneficiary of your IRA? 

Many individuals who name a charity as the beneficiary of their IRA (especially when there is no surviving spouse) find that donating retirement assets to charity and property to heirs is a tax-efficient strategy saving on both estate and income taxes, while knowing that their assets are being put to good use. 

If an individual with no surviving spouse decides to leave IRA assets to an heir, remember that the distribution to that beneficiary is subject to income tax at that person’s rate, significantly reducing the distribution as opposed to a qualified, tax-exempt charitable organization where the entire distribution would go to the charity.

  • As a tax-exempt organization, charities can draw on the funds without paying income tax on the distributions. 

  • If the donor estate is subject to tax it can take a charitable deduction for the amount left to charity.

The Beneficiary Designation Form for an IRA governs who will receive the IRA assets after the owner dies and is the simplest way to make the gift. It is always a good idea to have your estate planning attorney review the document to be certain your request will be executed as you desire.

Often, parents struggle with naming a charity as beneficiary when they’d also like their children to benefit from the assets…there is another charitable option to explore. 

For individuals looking to benefit charity as well as heirs, a Charitable Remainder Trust (CRT) may be a tax-efficient game-changer as it helps defer paying income taxes on the IRA assets. With a CRT, heirs can receive a steady income from the trust for a set period of years or their lifetimes and upon termination of the trust, the remaining principal goes to one or more charities as specified. 

A Charitable Remainder Trust is exempt from income tax since it is a charitable trust therefore, the income amount the heirs receive is greater being distributed through the CRT rather than being distributed directly to heirs as beneficiaries of IRA distributions. However, there may be state or Federal estate taxes to pay so it’s a good idea to work with a CPA.

Once the trust terminates, the remaining IRA assets pass to the charities benefiting from the trust.

There are stringent requirements to qualify as a Charitable Remainder Trust and these can be found in the Internal Revenue Code Section 664. Meeting with your estate planning attorney and CPA is essential to determining if a CRT is the best estate planning tool and tax-strategy for you and your family’s estate planning needs.

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