Gifting Your Retirement Assets to Charity

Do you plan to include your retirement assets in charitable donations? If so, then it’s wise to consider how it may affect your finances. In some cases, it can be more advantageous to name the charity as a beneficiary of your retirement account, rather than gifting the assets during your lifetime.

Below are some of the issues to consider when you think about donating your retirement funds to a charitable cause or nonprofit organization (NPO).

Should You Gift Now or at Death?

Instead of gifting your retirement assets to a charity during your lifetime, it can be advantageous to designate the charity as the beneficiary of your retirement account. Under this option, the charity—not you—will be treated as receiving the distribution; therefore, neither you nor your estate will owe income taxes on the amount.

While the amount will be included in your taxable estate, your estate will receive a deduction for the amount inherited by the charity, resulting in a reduction in the amount subject to the estate tax and thus in the taxes due on a taxable estate.

If you decide to designate a charity as the beneficiary of your retirement account, then you may want to do the following:

• Check with the plan administrator, or with the financial institution acting as plan custodian, to determine whether it has any restrictions on designating charities as beneficiaries for retirement accounts.
• If you are married, check to determine whether or not your spouse must consent to the designation. Failure to obtain spousal consent could result in a disqualification of the beneficiary designation, should it be determined that spousal consent was required.
• Make sure that the plan administrator or financial institution receives a copy of your beneficiary designation by requesting a written confirmation of receipt.
• Make sure that the individuals responsible for handling your financial affairs receive a copy of the beneficiary designation or know where to find it when necessary.

Caution: When a Charity Is One of Multiple Beneficiaries

If a charity is one of multiple beneficiaries for your retirement account, then it may have a negative impact on the options that are available to your other beneficiaries. For example, if you should die before your required beginning date (RBD), then your other beneficiaries will be required to distribute the assets by Dec. 31 of the fifth year following the year of your death. This can be resolved by one of the following means:

• Establishing separate retirement accounts for each beneficiary by Dec. 31 of the year following the year when you die. Thus, other designated beneficiaries can use the 10-year rule established by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Under the 10-year rule, there is no required minimum distribution (RMD) for the beneficiaries in any one year, but all retirement assets must be distributed by the end of the 10th year following the year of your death.
• The charity cashing out its portion of the inherited assets by Sept. 30 of the year following the year when you die. Under this rule, beneficiaries that receive a full distribution of their portion by Sept. 30 are disregarded for the purposes of determining the distribution options.
• The charity properly disclaiming its portion of the inherited assets by Sept. 30 of the year following the year when you die. Under this rule, beneficiaries that disclaim their portion by Sept. 30 are disregarded for the purposes of determining the distribution options. Careful steps must be taken to ensure that a disclaimer is qualified under federal and state laws.

If the charity is one of multiple beneficiaries, then it also could have a positive impact on the options available to other beneficiaries. If you should die after your RBD, for example, then all beneficiaries would be required to use your remaining life expectancy to take distributions of the retirement assets. This could be more beneficial for the multiple beneficiaries than the 10-year rule, depending on your age when you die.

Tax Implications of Gifting During Your Lifetime

The SECURE Act, passed in December 2019 and effective for retirement assets inherited on Jan. 1, 2020, or later, raised the required minimum distribution (RMD) age to 73 in most cases from 70½. This was the first time since the Tax Reform Act of 1986 introduced the concept of RMDs that the age was raised.

The qualified charitable distribution (QCD) age is still set at 70½. This allows a tax-planning opportunity during this 18-month period. You may be able to reduce the amount you are required to take in RMDs starting at age 73 if you donate to a charity between 70½ and 73. A QCD is not taxable. Even better, it also is not included in your adjusted gross income (AGI) calculations, so it can help reduce other taxes or your Medicare Part B premiums.

The SECURE Act also removed the tax strategy of utilizing a “stretch individual retirement account (IRA)” option for beneficiaries. Previously, inherited retirement assets were able to be passed down for generations with proper planning. As of June 20, 2020, most beneficiaries of inherited retirement assets (who are not nonperson entities such as charities) must deplete the funds within 10 years following the year of the owner’s death. The shorter time frame for distributions accelerates the payment of income tax on distributions taken by beneficiaries. Charities and tax-exempt nonprofit organizations are excluded from paying income tax, so it may be more beneficial from a tax perspective to leave retirement assets to them.

If you have both retirement and non-retirement assets in your estate, then it may be more beneficial for the charity to inherit your retirement assets and for your survivors to inherit your non-retirement assets, as the latter already may have been taxed. As mentioned earlier, the charity will not owe taxes on the amount inherited, whereas your heirs likely would owe taxes on the retirement assets that they inherit.

Trusts With Charitable Provisions

If you would like to make provisions for your heirs to receive an income stream from your retirement assets after you die, and for the balance to be paid to a charity, then you may want to discuss alternate beneficiary designations with your tax professional, such as a qualified terminable interest property (QTIP) trust or a charitable remainder trust (CRT). Under a QTIP, income is paid to your surviving spouse, with the balance remaining at your spouse’s death being paid to the charity. Under a CRT, a designated person receives a fixed amount from the assets each year, and the balance is paid to the charity upon that individual’s death.

SECURE Act Changes to Trust Beneficiaries

If the trust identifies a specific beneficiary (or beneficiaries) to receive all withdrawals from the IRA, then that individual or entity is treated as the direct beneficiary of the IRA. This is only the case when the trust is unable to accumulate any funds prior to disbursing the IRA withdrawals directly to its beneficiaries. It is considered a “conduit trust,” as the trust’s existence is ignored for the purpose of identifying a classification of the beneficiary.

Let’s say the beneficiary identified by the trust is a charity. In that case, the IRA is treated as having no designated beneficiary and will be subject to either the five-year rule or the life expectancy payout rule, depending on whether the owner already was taking distributions after the RBD at their death. Alternatively, if the beneficiary identified by the trust is an individual, then the IRA is treated as having either an eligible designated beneficiary or a designated beneficiary, and the respective distribution rules apply, depending on these classifications.

However, if the trust can accumulate withdrawals from the IRA, rather than disbursing withdrawals in their entirety to the beneficiaries, then it is considered an “accumulation trust.” This is the type of trust described above that is used to disburse funds to its trust beneficiaries over time. If a QTIP or a CRT assigns a charity or other nonperson entity as a beneficiary, even if there are other beneficiaries as well, then the trust is subject to either the five-year rule or the life expectancy payout rule for non-designated beneficiaries. 

Bear in mind, this is a high-level, oversimplified view of QTIPs and CRTs. Careful planning must be used when determining whether a trust should be the beneficiary of your retirement account. If you want to designate any type of trust as the beneficiary of your retirement account, be sure to consult first with a competent trust and estates attorney or a tax professional.

The Bottom Line

When it comes to the rules that apply to gifting your retirement assets to charities and the issues that should be considered, this article only scratches the surface. If you are thinking about making such a gift, be sure to check with your tax professional. In addition to ensuring that the charity will use the funds appropriately, you’ll want to make sure that the charity is a qualified organization for tax purposes.

Your tax professional should also be able to help you determine whether it is beneficial to gift your assets to a charity during your lifetime, whether you should designate the charity as your beneficiary, and/or whether you should gift your retirement or non-retirement assets. The best tax strategy may change over time, based on your age, distributions you’ve already taken, and your remaining life expectancy.