Charity and family members as beneficiary on one IRA

Submitted by Erwin Buck on Wed, 2016-12-21 20:34

Client wants to name Qualified Charity as a $50k beneficiary and her two brothers receiving the remainder 50/50. Do you see a problem with this?



Submitted by Bruce Steiner on Wed, 2016-12-21 21:05

Since there’s no executor controlling the IRA, the financial institution may require that the charity’s share be a fraction or percentage rather than a dollar amount.

Submitted by Alan - IRA critic on Wed, 2016-12-21 21:56

There will be major problems if the charity is not fully paid off by the beneficiary designation date (9/30 of the year following the year of client’s death).  Failure of full payout will result in the brothers losing their designated beneficiary status under most intepretations and becoming subject to either the 5 year rule (death prior to RBD) or having to take RMDs over the client’s remaining life expectancy (death after the RBD). Therefore, the client needs to leave some red flag notes in his estate and IRA files and also explain this to the brothers so that the charity will be paid off well before that deadline.

Submitted by David Mertz on Thu, 2016-12-22 01:41

I think that bsteiner’s concern is the primary one.  If the charity is left a dollar amount, unless that amount is to be adjusted for gains or losses between the date of death and the date that the charity’s portion is separated out, I believe that, regardless of when separate accounts are established, the separate account treatment is not allowed because the proportion to each beneficiary would otherwise vary with investment performance.  By specifying a fractional share for each beneficiary, including the charity, the proportion to each beneficiary remains constant and separate account treatment would be permitted provided that the separate accounts are established by 9/30 of the year following the year of death.

Submitted by William Tuttle on Thu, 2016-12-22 02:06

This could either be $50K or a smaller amount if the intent was $50k when distributed. This solves both the amount issue and the interference with the other beneficiaries. Also, the client can move amounts between the two accounts at any time to adjust to the charity:beneficiaries ratio. 

Submitted by Ben Meyer on Thu, 2016-12-22 03:32

The cleanest alternative, which spiritrider seems to be suggesting, would be for the IRA holder to divide the IRA into two separate accounts during her lifetime.  One of the IRA accounts would be for $50K, with the charity as beneficiary.  The other would be for the remaining balance, with the two brothers as 50/50 beneficiaries.  Also as suggested, the IRA holder will periodically transfer funds between the two accounts to maintain the first account at an approximate $50K balance as fluctuations or growth occurs.  Both accounts should be at the same institution to facilitate ease in making any transfers.  This approach will eliminate the need for a detailed and complex beneficiary designation, which might not be acceptable to the custodian, and will also preserve the stretch for the brothers regardless of the timeliness of administration.   

Submitted by Alan - IRA critic on Thu, 2016-12-22 03:32

It appears Natalie Choate opines that payoff of a charity’s pecuniary share by the 9/30 date trumps any gain/loss calculation for the pecuniary share:

C. Second exception: distribution or disclaimer by Sept. 30. The other exception is that a beneficiary is “disregarded” (doesn’t count as a beneficiary for purposes of determining the ADP) if such beneficiary ceases to have any interest in the benefits by September 30 of the year after the year of the participant’s death (called the “Beneficiary Finalization Date” in this Special Report). Reg. § 1.401(a)(9)-4, A-4(a); see ¶ 1.8 of Life and Death Planning for Retirement Benefits for more on the Beneficiary Finalization Date. Thus, the charity’s share can be paid out after the participant’s death at any time up to the Beneficiary Finalization Date, and the remaining beneficiaries (assuming they are all individuals) will be entitled to use the life expectancy payout method. As of the magic date there is no nonindividual beneficiary on the account, so the plan complies with the “all-beneficiaries-must-beindividuals” rule.Frank Example: Frank dies in Year 1. The beneficiary designation for his $1 million IRA provides that “$10,000 shall be paid to Charity X and the balance shall be paid to my son.” Charity X takes full distribution of its $10,000 share of the account shortly after Frank’s death. As of the Beneficiary Finalization Date (September 30, Year 2), the son is the sole remaining beneficiary of the IRA, because the charity’s interest has been terminated by distribution. As an individual, the son is a Designated Beneficiary, and RMDs will be determined based on the son’s life expectancy. The drawback of relying on the distribute-by-the-Beneficiary Finalization Date exception is that time passes quickly and people miss deadlines. If for any reason the charity’s interest is not entirely distributed (or disclaimed) by the deadline, the charity still “counts” as a beneficiary and the individuals would lose out on the life-expectancy-of-the-beneficiary payout method.

Submitted by David Mertz on Thu, 2016-12-22 14:40

  • I see.  It’s the difference between establishing a separate account for the charity (by 12/31) and fully paying out the charity’s portion by 9/30.
  • If the IRA custodian will accept it, it might be possible to specify in the beneficiary designation that the charity is to receive a fractional proportion equal to a dollar amount divided by the account balance on the date of death and that the remainder will be divided among the individual beneficiaries in certain proportions.  However, I’m always in favor of keeping things simple for IRA custodians, so I would instead do as others have suggested, split the IRA into two and transfer from one to the other to maintain a roughly constant amount in the IRA that has only the charity as beneficiary.  Otherwise, keep it as a single IRA, leave a fractional share to the charity, and adjust the fraction periodically to account for investment performance.

Submitted by Alan - IRA critic on Thu, 2016-12-22 16:39

I agree that fractional shares are the way to go. Generally, if the account does very well, all parties receive more and if it does poorly or the owner takes out more than the RMD, all receive less.

Submitted by Bruce Steiner on Thu, 2016-12-22 23:18

  • If the charity gets a dollar amount, but there isn’t enough cash in the IRA to satisfy the charity’s amount, who decides which assets to distribute to the charity, or which assets to sell to raise the amount in cash?
  • The easiest solution is to name the charity as the beneficiary of a fraction or percentage of the IRA, and then in the Will leave the charity a bequest of the desired dollar amount, reduced by the value as of the date of death of any IRA benefits passing to the charity.

  

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