Leaving a Legacy – Using a Retirement Account Beneficiary Designation to Gift to Charity
August 31, 2020
By J. Abigail Mason, CFP®
Designating a charity through a retirement account beneficiary designation is a great option for those who are philanthropic and who also want to ensure money is available during their lifetimes.
When you designate a charity as a beneficiary of your retirement account, the funds in your retirement account will go to charity upon your passing. Retirement accounts are an ideal asset to leave to charity, because charities do not pay income taxes. Therefore, the charity receives the full benefit of every dollar received from a retirement account. Alternatively, if an individual inherits a retirement account, income taxes are paid when the individual withdraws money from the retirement account.
Account holders can update their beneficiary designations by signing a beneficiary designation form. There are no attorney’s fees or costs involved with updating beneficiary designations. You can change your beneficiaries as often as you wish.
Three available methods to use when designated your retirement accounts to charities are:
1. Allocating percentages of your retirement account to charity
2. Splitting your retirement account into separate accounts
3. Naming a donor-advised fund (or community foundation)
Each method has pros and cons for donating to charity.
ALLOCATING PERCENTAGES OF YOUR RETIREMENT ACCOUNT TO CHARITY
You may divide your retirement account between charities and your heirs, allocating certain percentages to each beneficiary. If you are married, you may wish your spouse to receive all or most of your remaining retirement assets. You can update your primary beneficiary to your spouse and contingent beneficiary to include your chosen charitable groups. If your spouse predeceases you, the account will go directly to your contingent beneficiaries, which are the charities of your choice.
Some retirement accounts require the spouse to consent if they are not named the primary beneficiary of your retirement account. Talk to the custodian of your account to determine whether or not such restrictions exist.
SPLITTING YOUR RETIREMENT ACCOUNT INTO SEPARATE ACCOUNTS
If you prefer to designate a certain amount to a specific charity, you can rollover a specific dollar amount to a separate account before your death. You would name the charity as the 100% beneficiary of the new account. This allows you to have more control over the dollar amount the charity receives. The downside to splitting your tax-deferred account is that you will need to maintain multiple retirement accounts.
DONOR-ADVISED FUND OR COMMUNITY FOUNDATION
You can also name a donor-advised fund or community foundation as the beneficiary. Donor-advised funds are accounts that function like a charitable checking account. The funds are transferred to the account, and you no longer own the funds. However, you retain control to invest the account and direct the funds to the charities you choose. Upon your death, your retirement funds could be directed to a donor-advised fund and distributed to your chosen charity immediately (or through an endowed giving program).
Donor-advised funds allow you to name a successor trustee who would be responsible for distributing assets to charities after your death. You may want to include your children or heirs in your decision making about the donor advised fund. Then, the next generation would be able to continue your legacy by distributing the assets in your donor-advised fund to charities according to your wishes.
When gifting through your beneficiary designations, you can be as specific as you wish on the gifts. When creating a gifting plan, discuss the options available with your financial advisor as well as your estate attorney if your estate documents need to be updated.
J. Abigail Mason, CFP® is a 2007 graduate of Winthrop University with a BS in Business Administration and a minor in Accounting. Abby began her career at Abacus in January 2008. She was awarded the CFP® designation in 2011 and a Masters in Accounting from UNC Chapel Hill IN 2020.
As a member of the financial planning team, Abby works closely with clients to understand their objectives in order to develop, implement and monitor a comprehensive financial plan to achieve those goals.
ABACUS
Abacus https://www.abacusplanninggroup.com/ is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.5 billion on behalf of its 240 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.
