Life and Death Planning for Retirement Benefits

341 / 507

Chapter 7: Charitable Giving 341
The method of leaving retirement plan benefits to charity that involves the fewest
difficulties is simply to name the charity directly as the beneficiary of 100 percent of the death
benefit payable under the particular retirement plan, as in the following example:
“I name as my beneficiary, to receive 100% of the benefits payable under the above-named
retirement plan on account of my death, the ABC Community Foundation.”
Because the benefits are paid directly to the charity under the beneficiary designation form,
income tax on the benefits is easily avoided. causes the benefits to be included directly in
the income of the charitable recipient as named beneficiary, and the charity’s income tax
exemption makes the distribution nontaxable. The estate tax charitable deduction
is available for the full value of the charity’s interest.
This format works equally well for gifts to multiple charitable beneficiaries: If all
beneficiaries of the plan are charities, the problems discussed in do not arise.
But no approach is problem-free. Based on anecdotal evidence, there can be problems with
IRA providers and plan administrators when the participant seeks to name a charity as beneficiary.
For example, the administrator may require documentation (such as articles of incorporation,
corporate resolutions, etc.) before allowing the charity to collect the benefits it is entitled to. A
small charity lacking staff may need professional help.
7.2.02 Leave benefits to charity, others, in fractional shares
A charity can be named as one of several beneficiaries receiving fractional shares of the
retirement plan, with other fractional shares passing to noncharitable beneficiaries, as in “I name
as beneficiary of my IRA My Favorite Charity and my son Junior in equal shares.”
A. The problem: The IRS’s multi-beneficiary rule. The problem with this approach is that
it risks losing the option of a “life expectancy payout” for the noncharitable
beneficiary(ies). Under the “minimum distribution rules” a Designated Beneficiary can
withdraw inherited retirement benefits in annual instalments over his life expectancy, thus
achieving significant income tax deferral. See However, this favorable life
expectancy or “stretch” payout option is available only to individual beneficiaries (and
qualifying “see-through trusts”); a charity, as a nonindividual, cannot be a Designated
Beneficiary. See
If there are multiple beneficiaries, the regulations’ general rule is that all of them must be
individuals or none of them can use the life expectancy payout method. Reg. A-
3. Thus, if Junior and the charity are both named as beneficiary, the IRS’s “opening bid” is that
Junior cannot use the stretch payout method. There are two exceptions to this harsh rule. Because
of these exceptions, it is still feasible to name both charities and humans as beneficiaries of the
same account (though it may still not be desirable; see “D”).
B. First exception: separate accounts. If there are multiple beneficiaries, but the respective
beneficiaries’ interests in the retirement plan constitute “separate accounts,” each separate
account is treated as a separate retirement plan for purposes of the minimum distribution
rules. Thus, the Applicable Distribution Period for each individual beneficiary
will be his life expectancy, and he can use the life expectancy payout method for his