estate planning services

Charitable Planning with Retirement Accounts

Charitable planning is an important element for many estate plans – whether your primary purpose is minimizing the estate tax burden for your loved ones or whether charitable giving is a lifetime habit that you wish to continue, retirement assets can be a wise choice of assets for those who are looking to leave a legacy.

Below, we will discuss common methods of charitable giving with retirement accounts and the benefits of each strategy.

Naming a Charity as Beneficiary

Whether you name one charitable organization or a mix of organizations, naming a charity as a beneficiary for your retirement account is one of the simplest ways to start your charitable planning.

  • Naming a charitable organization as the beneficiary of your retirement account can effectively remove that account value from your taxable estate by creating an offsetting charitable deduction for estate tax purposes.
  • Unlike individuals, charitable organizations will not pay income taxes when taking distributions from the retirement account. So, if your loved ones are taken care of with other assets, leaving your IRA to a charitable organization may make sense.
  • When the organization is the only beneficiary, once they are informed of the account holder’s death, the charity will often take over the administrative side of distributing the account and taking any remaining required minimum distribution (“RMD”) which relieves your loved ones from the necessity of managing the retirement account.

If you have already created a Donor-Advised Fund (“DAF”) as part of your charitable planning, consider naming the DAF as the beneficiary of your retirement account. This will allow your retirement funds to support multiple charities at once while offering your loved ones flexibility to decide how and when the funds should be disbursed to charity.

If you want to name several beneficiaries on your retirement accounts, consider reaching out to an experienced financial adviser or estate planner to discuss your options – whether you split your retirement accounts so that each account has a single beneficiary, you customize your beneficiary designations with your custodial account holder or discuss other strategies to tier distributions from your retirement account – exploring options with a financial planner or estate planning attorney can help structure your charitable planning with your retirement accounts.

Use Caution when Naming a Charity as a Beneficiary Along with Your Loved Ones

In light of the considerable changes to the rules for inherited retirement accounts under the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), beneficiaries are subject to different distribution timelines depending on their circumstances.  While spousal beneficiaries still have several options when inheriting retirement accounts, most other individuals are required to fully distribute the inherited IRA within 10 years.

However, if the account holder passes away before his or her required beginning date (“RBD”) and a beneficiary does not qualify as a “designated beneficiary” under the SECURE Act, the retirement account must be fully distributed within 5 years. If certain steps are not taken in a timely manner, your individual beneficiaries may be required to complete the distribution of their allocable portion of the retirement account within that same 5-year period rather than the 10-year period for “designated beneficiaries”. 

Luckily, there are strategies available to your beneficiaries that should allow them to avoid this shortened distribution period while still accomplishing your charitable giving:

  • The beneficiaries can each establish separate inherited IRA accounts by December 31st of the year following the account holder’s death which allows the individuals to qualify as a “designated beneficiary” under the SECURE Act. 
  • If the charitable organization “cashes out” it’s portion of the retirement account by September 30th of the year following the account holder’s death, the organization is disregarded for purposes of determining whether the retirement account beneficiaries are “designated beneficiaries”,

Additionally, if the account holder has passed his or her RBD already, the beneficiaries will use the decedent’s remaining life expectancy – whether the beneficiary is a “designated” individual under the SECURE Act or not.

Charitable Remainder Trust (CRT) As an IRA Beneficiary

When structured properly, a Charitable Remainder Trust (“CRT”) can benefit both charitable organizations as well as your loved ones. While the SECURE Act eliminated the “stretch IRA” for most beneficiaries, a CRT can establish a stream of income which is payable to your individual beneficiaries over an extended period of time while creating a charitable deduction for your estate. Following the termination of a CRT, the remainder of the trust will be distributed to the charitable organization. 

When establishing a CRT, you must consider how the beneficiary receives funds, the period of time you want to set for the trust term, as well as the period in which they will receive said funds must be determined in accordance with the minimum percentage of the trust that the charitable organization must receive. 

Individuals who benefit from a CRT are required to pay income tax on their annual payments, but charitable organizations will not. Partial estate tax deductions are available for CRT payments after the passing of the IRA owner. 

At Sessa & Dorsey, we will continue to monitor further changes to the SECURE Act and how these changes may affect the future of our clients.

Qualified Charitable Distributions as an Alternative

Beneficiary designations are not the only way to use retirement accounts for charitable giving. If you are over the age of 70 ½, you can make Qualified Charitable Distributions (“QCD”s) directly from your retirement accounts.  A QCD, made directly from your retirement account to the charitable organization, removes the amount from your taxable income before any deductions – rather than recognizing the income and showing a charitable deduction. This means that QCDs will benefit individuals, regardless of whether they would otherwise itemize their annual deductions.

Additionally, QCDs can count toward any annual required minimum distribution (“RMD”), making charitable donations directly from the retirement account a simple way to reduce taxable income while meeting your charitable goals.  Because QCDs reduce the taxable income for any given year, there are some limitations on the amount. Currently, the total annual qualified QCD can be no more than $100,000 for any one individual – or up to $200,000 for married couples who file jointly.

Talk to an Experienced Estate Planning Attorney for More Insight

While some may consider naming a charity as a beneficiary on a retirement account to spare their loved ones from high taxes, charitable planning with retirement assets can accomplish many goals for you and your family. Charitable planning, whether using retirement assets or otherwise, can also greatly impact the lives of many people and support causes which are significant to you and your loved ones. 

For more information on potential tax-saving strategies for you and your family, as well as other options for making philanthropic contributions to the causes and charities that mean the most to you, schedule a consultation with an experienced estate planning attorney today. 

At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best estates and trusts for their specific needs and desires. If you have questions, please contact us at (443) 589-5600.

Related blog posts:

3 Benefits of a Donor-Advised Fund as a Charitable Giving Strategy
How to Have a Conversation With Your Family About Your Wishes for After You Pass
When to Consider Using a Qualified Charitable Distribution (QCD) to Reduce Taxes
Understanding the Ins and Outs of Charitable Giving
Estate Planning 101: Who Should I Choose as My Trustee?

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