Retirement Plan – Estate Distributions: Questions Donors Ask

Donors should contact their IRA or retirement-plan administrator and request a copy of the Change of Beneficiary Form. This can be filled in as the donor wishes and include your organization for a portion or all of the remainder of their plan’s assets.

For gifts at death, any portion of the donor’s retirement-plan assets that are given to a qualified charity will also qualify for income-tax, inheritance-tax, and federal and state estate-tax deductions, as applicable to the size of their estate as well as the state of domicile. Any assets coming out of a donor’s plans to his/her heirs may be subject to all of the taxes mentioned above. Retirement assets are considered “income in respect of a decedent” in the donors estate, which means that she/she will be subject to income tax on the estate or the hands of their beneficiaries, including his/her spouse. Retirement assets are also subject to estate tax if left to non-charitable beneficiaries other than a spouse. Retirement assets distributed to a qualified charity like your organization will pass free of both income and estate tax, allowing the full value of the assets to be applied to charitable purposes that the donor designates. It will also reduce the taxable estate to the donor’s other beneficiaries, creating an excellent opportunity to make a significant gift to your organization while providing a tax benefit to his/her family and heirs.

Yes. The rules are a bit tricky, so donors will want to consult with an attorney who specializes in estate and charitable planning to make sure the plan is created to maximum benefit and without inadvertent tax liability.

Yes. Donors can use retirement assets to make outright gifts or to fund a life-income gift. Donors will have to balance the implications of taking taxable withdrawals from their plan against the charitable income-tax deduction the donor can receive and the impact that the gift can make. In some cases, a donor may be able to transfer assets from their retirement plan directly to an account funding a life-income gift without realizing a tax event.

Effective January 1, 2020, this Act brings some significant changes to the management and distribution of retirement-plan assets:

• The age for required minimum distributions (RMD) rises from age 70½ to age 72.*
• The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.
• Most non-spousal beneficiaries of “inherited”retirement funds are required to withdraw the full account within a ten-year period. This can result in much larger taxes for beneficiaries and result in no further financial benefits after the ten-year period. Donors wanting to mitigate the annual taxes AND provide lifetime income benefits for heirs may want to consider leaving their retirement plan assets to a charitable remainder trust. The real beauty of this plan is the ultimate support it provides for nonprofits.

*Not to be confused with the age for a Qualified Charitable Distribusion (IRA Rollover) that remains at 70½.