Retirement funds and charitable planning may not be two areas most people would naturally think to combine. But in many cases, donating retirement benefits to charity can be an ideal solution, both for the donor and the recipient.
The first and best reason to leave scalp massager benefits benefits to a charity is, as with any philanthropic gift, to benefit the organization. If you don’t want to help a particular charity achieve its goals, there is no advantage to making it any sort of gift. While you can certainly make charitable gifts in more or less cost-effective ways, the point of giving is to transfer assets to a cause you wish to support. Leaving retirement benefits to charity may help achieve other estate planning goals, as I will discuss later in this article, but only if philanthropy is already a priority.
That said, once you have one or more charities in mind, few people want to cut the government a larger piece of the pie than necessary. Giving retirement plan dollars to charity can be a highly tax-efficient use of your savings. Note that, throughout this article, the retirement benefits I am discussing are those where distributions typically trigger income tax, such as traditional IRAs or qualified retirement plans. Roth plans, where distributions are income tax-free, do not offer any particular advantage for charitable giving.
Since charities are exempt from income tax, they can receive gifts of retirement benefits tax-free, as long as the gift is structured correctly. Retirement plan assets are therefore worth more to a charity than they would be to an individual who would have to pay tax on any distributions.
In contrast, an inheritance is not considered income, so inherited cash would not be liable to income tax. Heirs must pay capital gains tax on other inherited assets such as stock or bonds, but generally only on gains that occur after the decedent’s death; taxes on gains that accumulated during the decedent’s lifetime are forgiven through a so-called step-up in the asset’s cost basis to its date-of-death value. A retirement plan, on the other hand, does not receive this stepped-up basis.
There are situations in which leaving retirement benefits to charity might not be an ideal estate planning solution. A young individual beneficiary may, in fact, do better to inherit a retirement plan than to inherit an equivalent amount of after-tax dollars. This is because, if he or she makes use of the mechanism that stretches payouts over the beneficiary’s life expectancy, the power of income tax deferral may leave the beneficiary better off.
The minimum distribution rules for retirement accounts also mean that you could end up leaving the charity relatively little if you live long enough to exhaust most of the plan’s value. Long-lived plan participants may wish to consider giving their minimum required distribution directly to the charity each year, or revising an estate plan to provide for the charity in a different way as the retirement plan diminishes in value.
How To Make A Charitable Gift With Retirement Benefits
If you plan to leave your retirement plan to a charity, there are several ways to go about it, each with its own advantages and disadvantages. Maybe the most straightforward way is to simply name the charity directly as the beneficiary of 100 percent of the plan’s value at death. Income tax is easily avoided, and the estate tax charitable deduction is available for the full value of the gift. This method also works if you leave a retirement account to multiple beneficiaries, as long as all of them are charities. With this method, it is important to make sure all paperwork is in order. Some plan administrators may require documentation before allowing the charity to collect the benefits, so it is important to make sure that no one involved is taken by surprise.
If you wish to split a retirement account among several beneficiaries, and not all of them are charities, planning becomes slightly more complicated. The general rule is that either all beneficiaries must be individuals, or none of them can use the life expectancy payout method. If you name your son and a charity as equal beneficiaries of your IRA, unless you take additional measures, your son will be forced to forego the income tax deferral he could otherwise enjoy. Note that if your spouse is the only non-charitable beneficiary, this issue is not a concern, since he or she can simply roll over the share of benefits into his or her own retirement plan.
There are two ways to work around this rule. If the beneficiaries’ interests in the retirement plan constitute “separate accounts,” each account is treated as a separate retirement plan, so individuals can take advantage of the stretch payout options. This method is useful, but risky, because beneficiaries must establish separate accounts by December 31 of the year after the year of the plan participant’s death; if they do not, the less beneficial rules automatically take effect. The other option is for the charity to receive a full payout of its share by September 30 of the year after the year of the participant’s death. In this case, the charity is “disregarded” as a beneficiary and individual or individuals can take distributions as they would if no charity had been named.