Charities Need to Cash Out Partial IRA Distributions

The most tax-efficient charitable bequest is generally a distribution from an IRA or qualified retirement plan:  Income tax and transfer tax savings resulting from charitable deductions and charity’s tax-exempt status can reduce the cost of such a bequest to just pennies on the dollar.  Charity can be named to receive the donor’s entire account, or just a fraction or percentage, with the rest passing to designated beneficiaries.

Most organizations want to receive IRA distributions as quickly as possible, but suppose an organization decides it likes the current investments and proposes to leave the account alone for several years.  If charity is the 100% beneficiary of the account, that approach should not produce adverse consequences.  But if charity is named as only a partial beneficiary, with the rest of the account going to family members or others, the designated beneficiaries will lose the option of stretching future distributions over their life expectancies.

The regulations suggest that a charity that is a co-beneficiary of a retirement account could “cash out” of the arrangement after the donor’s death, permitting the other beneficiaries to use their own life expectancies to calculate future distributions. If charity fails to cash out by September 30 of the year following the donor’s death, and the donor died prior to the required beginning date for distributions (April 1 of the year following the year in which the owner reaches age 70½), the account must be distributed within five years. If the donor died after the required beginning date, the account must be distributed within the donor’s theoretical life expectancy.

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