Consider Naming your Favorite Charity(ies) as Beneficiary of your IRA

Naming a charity as the beneficiary of your IRA can be one of the most tax‑efficient ways to support a cause you care about. It’s a simple change on a beneficiary form, but it can dramatically reduce taxes and increase what ultimately goes to your heirs and your favorite organizations.

Why IRAs Are “Tax-Heavy” for Heirs

Traditional IRAs are funded with pre‑tax dollars. That means:

• You never paid income tax on the contributions or growth.
• Whoever inherits the IRA will generally pay income tax on every dollar they withdraw.

For non‑spouse beneficiaries, the SECURE Act now usually requires the account to be emptied within 10 years. If your children or other heirs are in high tax brackets, those inherited IRA withdrawals can be taxed at steep rates, shrinking what they actually receive.

Why Charities Are Ideal IRA Beneficiaries

Qualified charities don’t pay income tax on donations. If a charity inherits your IRA:

• The full value of the account can go to the charity income‑tax‑free.
• The portion left for individual heirs can come from more tax‑favored assets (like after‑tax investment accounts).

In other words, you’re matching the “tax‑heaviest” asset (your IRA) with the beneficiary that can handle it most efficiently (a charity that doesn’t pay tax).

Potential Estate Tax Benefits

If your estate is large enough to face estate tax (that is, in MA, over 2 million dollars):

• Amounts passing to a qualified charity are generally deductible from your taxable estate.
• Leaving an IRA to charity can reduce the size of your taxable estate and the estate tax due.
• Other assets, like stock or real estate (sometimes referred to as “after-tax assets”), can be left to individuals with more favorable tax treatment (for example, a step‑up in basis for appreciated assets under current law).

This combination can increase the net amount that both your heirs and your chosen charities receive.

Coordinating with After-Tax Assets

A common strategy is:

• Name a charity (or multiple charities) as beneficiary of all or a portion of your traditional IRA.
• Leave taxable brokerage accounts, Roth IRAs, or real estate (“after-tax assets”) to family members or other individuals.

This way, the assets that are more tax‑efficient for individuals go to them, and the least tax‑efficient asset (the traditional IRA) goes where it won’t be taxed at all.

How to Put This in Place

The mechanics are straightforward:

1. Ask your IRA custodian for a beneficiary designation form (or update it online).
2. Name the charity (or charities) and specify percentages.
3. Use the charity’s full legal name and tax ID to avoid confusion.
4. Review regularly and whenever your family or charitable goals change.

Don’t Forget Professional Advice

The tax rules around retirement accounts and estates change over time, and your personal situation matters. Before naming a charity as your IRA beneficiary, it’s wise to:

• Talk with a tax advisor or financial planner; AND
• Coordinate your planning with us to ensure your will, trusts, and beneficiary forms all align.

By thoughtfully naming a charity as beneficiary of your IRA, you can turn a tax‑burdened asset into a powerful, tax‑efficient gift—supporting the causes you care about while potentially improving the after‑tax inheritance for your loved ones.

Founded by a nurse attorney and with offices in Acton, Andover, and Sudbury, Massachusetts, Generations Law Group helps families navigate the complex areas of estate planning and elder law to inform and protect loved ones of every generation.

 

Contact Us