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Advisor's Quarterly Update

Charitable Planning Using IRA Beneficiary Designations

Clients often want to make final gifts to favorite charities from their estates. Assets left in retirement accounts such as an IRA can accomplish your client’s philanthropic objectives while minimizing potential taxes to heirs. Completing an IRA beneficiary form appears to be a simple process, but if not done correctly can result in a failed designation, no gift to charity, and possibly substantial income taxes.  It is helpful to recognize issues when completing an IRA beneficiary designation form.

• Income tax avoidance. Assets in traditional IRA accounts, in most cases, have never been taxed and are considered income in respect of a decedent (IRD). Using these assets for testamentary charitable gifts rather than leaving them to individual beneficiaries will avoid income taxes from being paid on these assets.

• Estate as beneficiary. The estate should not be made the beneficiary of an IRA account. Absent very specific language in the will for charitable gifts from these assets, the estate will become liable for the income taxes on the account.

• Disclaimers by administrators.  Some IRA administrators have disclaimers on their IRA application form stating that the administrator assumes no responsibility for notifying beneficiaries when the account owner dies. Clients may want to make both charitable and individual beneficiaries aware of these accounts or provide a copy of their beneficiary designation form to their estate planning attorney to ensure all beneficiaries are notified at the appropriate time.

• Accessing the form. The beneficiary forms most likely can be downloaded online. Some administrators have websites where the account owner can complete the beneficiary designation online. Whatever method is used, a copy of the completed designation should be retained by the client and the attorney.

• Identifying the charities. Some charities have similar names. Consult charity staff for the correct name. If possible, insert the charity’s preferred address and taxpayer identification number. Unfortunately, many of the forms do not provide sufficient space for supplemental identifying information.

• Restricting the gift. Clients may wish for their gift to be used for a specific program. It is advisable for the client to provide a memorandum to the charity or the client’s attorney expressing the client’s wishes when the funds are received. Some attorneys will prepare a separate addendum to the beneficiary designation form to be kept by the IRA administrator, but not all administrators will accept such supplemental documents.

• Percentage vs. specific dollar amount. In almost every case a beneficiary designation form only permits designation of a percentage of the remainder in the IRA to intended beneficiaries.  This makes sense because the balance in the IRA at death is unknown.  Most plans will not permit designation of a specific dollar amount for any beneficiary.

• Spousal consent. Under federal law, spousal consent is not necessary to name a non-spouse beneficiary of an IRA account. However, spousal consent may be required under state laws. Check the laws for the state of residence of the client to determine if spousal consent is necessary if non-spouses are names as beneficiaries of an IRA account.

Clients are grateful when their professional advisors can assist in fulfilling philanthropic wishes in a tax-efficient manner. Careful preparation of the IRA beneficiary designation form ensures that your client’s wishes will be realized by charities without complication or unnecessary delay.