How to donate an IRA to a charitable cause

My recent series about the role of an executor encouraged “Jane” to share her story and ask about gifts to charity:

“I have a unique situation in that I have no spouse, no children nor other blood family members to whom I plan to leave anything other than token personal items. I do have close friends, one of whom has agreed to be my executor. How is it possible to leave any remaining IRA assets to a designated charity? I do not have a very high net worth and would prefer not to overcomplicate my estate planning situation.”

Let's talk through some options.

First: If you have a particular charity in mind, you can name the charity as a beneficiary of your IRA. You would ask the custodian of your IRA to provide you with a “beneficiary designation form” for you to write in the name of the charity.

If I wanted to leave my IRA to two local hospitals, for example, I would use the beneficiary designation form to write in “Stamford Hospital” for 50% of the IRA and “Greenwich Hospital” for 50%.

This type of gift becomes effective after death through the beneficiary designation, which acts as a will substitute. That is, the beneficiary designation controls the disposition of the IRA, and if you don't use the beneficiary designation to name a beneficiary, the IRA custodial agreement will provide a default provision that will apply. The will does not interfere with or take precedence over the beneficiary designation.

If Jane does not have a particular charity in mind, another option is to set up a donor-advised fund, or DAF, and name the DAF as the IRA beneficiary.

Setting up a DAF is relatively simple; there are costs associated with DAFs, and typically, they are used for lifetime charitable gifting. Take a look at the website for Fidelity Charitable for an example ( tinyurl.com/mptwc8wj).

So, Jane, a DAF could be of interest to you if you wanted to easily donate to multiple charities, while tracking the history of your donations. Another resource on DAFs is Flexible Giving: Understanding Donor-Advised Funds, from FINRA, the Financial Industry Regulatory Authority, which regulates the brokerage industry ( tinyurl.com/2dnyxhym).

Here is one argument for using a DAF instead of directly sending to a charity: As pointed out by Fidelity Charitable, “naming a public charity with a donor-advised fund program ... as beneficiary of a tax-deferred retirement account such as an IRA or 401(k) gives clients and heirs more flexibility . ...

“Upon death, your IRA assets can fund the donoradvised fund. It can then be distributed to charities immediately or over time through an endowed giving program.”

Is naming a charity as your IRA beneficiary a good idea? It certainly can be, especially for someone in Jane's position. Not only are Jane's charitable wishes carried out, but tax efficiencies are also gained.

As Fidelity Charitable points out, “there can be significant tax advantages to donating retirement assets to charity as part of an estate plan. When done properly, charitable donations of retirement assets can minimize the amount of income taxes imposed on both your individual heirs and your estate” ( tinyurl.com/3tnxf53h).

On a separate note, I will be doing a CLE (Continuing Legal Education) virtual presentation on Feb. 28 on conflicts of interest in the financial industry. If you would like to join me, go to tinyurl.com/2v8txy5h for more details.

Seasoned Investment Counsel and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients),” published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.