Charitable intentions and retirement accounts can be a potent estate planning combination. Traditional IRAs are funded with pretax dollars and grow tax free, but income tax comes due when the money comes out, whether during the account owner’s lifetime or after their death. Giving a charity a taxable retirement account maximizes an estate’s impact: The charity pays no tax, when other beneficiaries would. In fact, as estate planners, we often advise clients to name charities directly as beneficiaries on taxable accounts and leave other assets to individuals. The charity option seems simple: Donor dies, and charity collects. But it’s not always that easy. There are at least two significant complications.
Complication One: Secrets
When assets transfer as a result of a beneficiary designation, it’s a private transaction. No notice is provided as it would be with a will or a trust. But funds do not flow automatically. Financial institutions holding accounts with beneficiaries are generally under no obligation to track down someone to give the money to. It is the beneficiary’s obligation to come forward. This is true of all beneficiaries, not just charities. It’s also true of other assets. Almost any type of account can have a beneficiary, “pay on death,” or “transfer on death” designee. Account holders can’t count on the bank to notify anyone, even a charity.
Beneficiaries need to know they are named on an account. But there’s often a reluctance to share. Some estimates indicate only 1 in 10 donors inform charities that they are named as beneficiaries. It’s understandable. Many people change their minds. Sometimes often. And no one wants to be in the position of informing a charity one day that they are in, and at a later time, that they are out. But as much as ninety percent of donors risk that their gift never makes it to the intended recipient. (How sad is that!)
Another challenge: Keeping the charity informed. Beneficiaries obviously also need to know that the account holder has died. Many charities and their donors have close relationships, and the charity is quickly informed of the donor’s death. Many donor-charity relationships, however, are not that chummy. A charity may be notified of being a beneficiary, then hear nothing and be left wondering what happened to their gift.
Complication Two: Policies
Many charities have encountered problems with transferring IRA funds from the financial institution after the IRA owner’s death. It can take years for the charity to secure the gift that was supposed to be so easy.
Financial have their rules, which are often absurd for charitable organizations. Charities are treated like people, which they are not. They often must create an inherited IRA account. That meanss means double the paperwork. They may be asked to divulge personal information about their staff or board members due to the Patriot Act or “Know Your Customer” requirements. They may be told that 10% of the IRA must be withheld to pay income tax (but they don’t pay tax!), resulting in extra effort to get the 10% back.
This problem is so frustrating for charities that there is now a grassroots effort called the RIFT (for Release IRA Funds Timely) Project that aims to educate institutions and charities on the subject. Charites track and coordinate efforts to collect funds. Information is shared about financial institutions’ policies and which are easy to work with and which are not, and institution-specific tips are given on how to effectively advocate for donors’ wishes.
How Can You Help?
Donors want charities to get their bequests—and not wait years. To help the effort, donors can be proactive about making gifts in ways that reach the recipient efficiently.
- Share your news. Tell the charity they are named as beneficiary. Include the beneficiary designation form (keep a copy in your records, too) and, if possible, a copy of the plan documents. If you’d rather not tell during your lifetime, then leave comprehensive instructions with your estate administrator. Include details about who is named on each account, the beneficiary designation form, and explicit instructions that the beneficiary should be informed of the death and provided a death certificate to facilitate collection of the asset. Also consider including your intention in your will or trust. But if you change your mind, don’t forget to change those documents!
- Consider tax. Does the tax savings matter? If paying income tax isn’t a concern for you, make your bequests via your will or trust and let your executor or trustee do the frustrating work of wresting funds from the IRA custodian so the charity can spend their efforts on their mission.
- Consider tax. If tax does matter, consider making gifts during your lifetime, so you enjoy the tax break while you are alive. Consider the QCD, or Qualified Charitable Distributions, from your IRA.
- Go custodian shopping. Seek charity-friendly institutions and move your accounts. The RIFT project updates its database regularly and has made progress convincing some institutions that the troublesome policies should not be applied to charities.
A little effort can help your chosen charities put your money to good use more quickly and more efficiently.