As mentioned in the preceding section, donor-advised funds are suitable recipients for retirement benefits as well. By leaving assets to a DAF with family members as advisors, you may encourage philanthropy in your heirs while taking advantage of the fund’s income tax-free nature. Take care to make sure that the fund you choose, however, meets the applicable requirements to assure the tax-free nature of the contribution.
Charitable remainder trusts (CRTs) that meet certain requirements are also income tax-exempt. Those that meet the requirements can be suitable recipients for retirement benefit gifts. This strategy can benefit the individual heirs of the trust through an annual payout, either a fixed dollar scalp massager benefits (in a charitable remainder annuity trust) or a fixed percentage of the trust’s value (in a charitable remainder unitrust). Note that, as with many trusts, the administration can be relatively complicated and costly, and it is important to secure expert help in setting up a trust correctly. It is also important to know that qualified plan benefits have certain federal law protections that may mean your spouse must give consent before you can leave such benefits to a CRT. It can sometimes be appropriate to leave retirement account benefits to a charitable lead trust (CLT). However, unlike CRTs, CLTs are not exempt from income tax. For that reason, usually there are better ways to give retirement benefits to a charity (and better ways to fund the trust).
If you wish to support a beneficiary while also giving to a charity, some charities will allow you to fund a charitable gift annuity with retirement benefits. This approach avoids several of the complications created by leaving benefits to a CRT.
You should avoid leaving retirement benefits to a pooled income fund. Such a fund is maintained by the charity that will ultimately receive the gift. The organization pools the gifts of many donors, investing them and paying back a share of the fund’s income to the donor or a named beneficiary. When the donor or beneficiary dies, his or her share of the fund reverts to the charity. Such funds have use in life mainly as a lower cost alternative to a CRT. However, pooled income funds are not income tax-exempt, even if the charities running them are. All the benefits discussed in the previous section would therefore be lost.
Most people will probably want to continue using their retirement accounts during their lifetime, but this consideration does not apply to everyone. Making charitable gifts with retirement benefits, therefore, does not only have to be an estate planning technique.
In most cases, the only way to give assets in a retirement account to charity during your lifetime is to withdraw the money first. This generally means the withdrawal will be taxed. If you make the gift in the same year as you take the distribution, the income tax charitable deduction could theoretically offset the tax on the distribution. Unfortunately, various restrictions including the percent-of-income limit on charitable contribution deductions, deduction reduction for high-income taxpayers and others mean that this is most likely not the case. Taxpayers who use the standard deduction rather than itemizing will not see any tax benefit from their gift.
Some of these drawbacks can be avoided by using smaller distributions and gifts. In addition, it is worth considering donating your minimum required distribution if you do not need it for other purposes. You must take your MRD annually from IRAs and other plans after a certain age. While it does not receive special tax treatment, you have to take the distribution regardless, and a charitable gift may well bring at least some tax benefit.
At this writing, Congress in considering efforts to revive a rule (which expired in 2013) that allowed individuals over 70 1/2 to transfer funds directly from an IRA to a charity without taking a distribution first. If this option returns, it has narrow limits, but is obviously beneficial for lifetime gifts from IRAs.
Retirement plan participants who take distributions before age 59 1/2 are usually subject to penalty taxes. However, if a young participant wants to pledge annual gifts to a charity, an exception known as the “series of substantially equal periodic payments” might make this possible. Because this exception must meet extensive IRS requirements, you should strongly consider consulting a professional to arrange such a gift.
Some sorts of distributions are not subject to full normal income tax, which may make them better suited to charitable giving. For instance, distributions of employer stock from a qualified plan receive special favorable treatment. Any appreciation above cost basis that occurs while the stock is in the plan is called net unrealized appreciation (NUA), and is not taxed until the stock is sold. If you hold stock that has untaxed NUA, you could contribute it to a CRT, avoiding capital gains tax while generating an income tax deduction.