Charity as Designated Beneficiary
I need some clarification on having a charity as a designated beneficiary on an IRA. What I think I know is that since a charity is not a living person, the IRA would have to distributed by the end of the year that includes the fifth anniversary of the IRA owner’s death. Notice I say “think I know.” It seems to me that the whole IRA would have to be distributed before the final estate tax return is filed so that the estate can pay the taxes, but I cannot find that anywhere in the literature. Is there anything else I need to know about having a charity as the designated beneficiary. I realize that it is not a great idea since the ability to stretch out distributions is lost, but is there anything else? I very much appreciate your feedback! Jennifer Luzzatto
Permalink Submitted by Alan Spross on Wed, 2011-11-02 20:29
Leaving a traditional IRA to a charity is an effective way to make a charitable contribution because the charity will not owe any income taxes when they cash out the IRA. Since there is no income tax due there is no need to stretch the IRA and therefore a lump sum distribution is typically taken before any RMD would be due.
For federal estate tax, the date of death IRA value is included in the gross estate, but the charitable deduction is applied to determine the net taxable estate.
The situation is more challenging if there are other beneficiaries on the IRA in addition to the qualified charity. That puts additional pressure to pay off the charity or create separate accounts for the individual beneficiaries by the deadline. If the owner dies prior to the RBD, not paying off the charity in time or creating the separate accounts will result in the other beneficiaries being subjected to the 5 year rule.
Permalink Submitted by Jennifer Luzzatto on Tue, 2011-11-08 01:29
Alan,
Thank you so much for your reply to my post last week. It is great to have experts to go to! In thinking about your reply, I believe I understand that if an estate is small enough (below whatever the exemption is for that point in time), and not subject to estate taxes, then no taxes would be due on the the amount in the IRA that is given to charity. Is that correct? Thanks! Jennifer Luzzatto
Permalink Submitted by Alan Spross on Tue, 2011-11-08 03:04
Correct.
1) No income taxes due from the charity when they cash out the IRA.
2) No estate taxes due from the IRA owner as long as the net estate is below the unified credit (now 5 million) after subtracting the amount of the IRA that goes to the charity.
Note: There are a few states that have state estate taxes with unified credits well below the 5mm federal credit.