Leaving Your IRA to Your Family First, Then to Charity

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Suppose you have a situation where you’d like to leave your IRA (or at least some of it) to a family member or a group of beneficiaries, and then leave the remainder of the IRA to a charity of your choice.

One way to do this is to split the beneficiary designation between your family members and the charity. This is a simple way to make this designation, but it might not really achieve the purpose you’re hoping to. Suppose you’d like to make certain that a non-spouse family member has adequate income from your IRA for the remainder of his or her life, but you don’t want to overdo the bequest with a large appropriation (and taxes on the distribution). There’s a way to do this that may fit your needs: the Charitable Remainder Trust, or CRT.

The Charitable Remainder Trust

Using a Charitable Remainder Trust, or CRT, can be a useful way to ultimately pass your IRA or Qualified Retirement Plan (QRP) to a charity, while at the same time providing income to other beneficiaries for life. The way this works is that the CRT would receive a distribution of the IRA’s assets (within 5 years of the death of the original owner), and the beneficiaries can then receive income for the remainder of their lives. Because the remainder of the trust (at least 10% of the original value distributed at the death of the original owner) will ultimately pass to the charity, the estate receives a charitable contribution deduction for a portion of the account, actuarially-defined.

Since the funds are no longer in the IRA or QRP, the beneficiaries are not subjected to Required Minimum Distributions (RMDs) from the account – these can be tailored to the individual beneficiary’s requirements. Amounts between 5% to 50% of the IRA value can be distributed to these beneficiaries. On the downside, the amount of income will have to be pre-set, either a set amount or a set percentage of the account, and this amount cannot be changed. In other words, if the beneficiary wants more than the set amount of distribution, the distribution amount cannot be increased.

If there are multiple beneficiaries of the trust, as members of the beneficiary group die the other remaining beneficiaries will receive the income attributed to those beneficiaries, until all beneficiaries have passed on. Since there are restrictions on the CRT that require that at least 10% of the total trust value remains to be distributed to the charity, it won’t work well if the beneficiary class includes very young members. If there is a very long period of time to pay income, the remaining account value may be reduced below that restricted amount – and the distributions will slowly diminish.

This method may not be useful to everyone, but it could be useful for certain specific situations. An example would be if you had multiple IRAs, and had one in particular that you wanted to eventually pass on to a charity. At the same time you want to ensure that you don’t short-change your family or friends – maybe you have a couple of siblings that you’d like to pass along a life income to, perhaps in addition to leaving other assets these beneficiaries.

The CRT also has the benefit of passing along favorable taxation to the beneficiaries, which can include capital gains and dividends rates as well as ordinary income tax rates. Working with your tax advisor and other professionals is recommended to fully understand this potential.