Do You Want a Charity to be a Beneficiary of Your IRA? Why or Why Not?

Many clients have charitable intent and may include provisions for charities in their Last Will and Testament and/or revocable trust (the “Trust”). But what if you have a substantial IRA and you have named your spouse and your children as beneficiaries of the IRA and name charities as beneficiaries in your Last Will and Testament and/or Trust? Is there a better way? As with all good attorney answers… it depends.

IF you have charitable intent and plan to benefit charities as well as your family, consider makin ng the charity a direct designated beneficiary of the IRA if, and only if, you have funds to provide for your family through your Last Will and Testament and/or Trust.

Generally, distributions from a regular IRA will be taxable income to the beneficiary. However, if you name a charity as a direct beneficiary, then the charity, if tax exempt, will not have to pay income taxes on the IRA distributions. Of course you need to carefully analyze the composition of your estate to determine which assets are distributed to your family and to charity.

Many individuals, whether intentionally or not, make their Trust the beneficiary of their IRA and then the Trust provisions direct the distributions to a charity. Can you obtain the same benefits making the charitable disposition through a Trust as you do making the charity the direct beneficiary of the IRA?

Generally, if a Trust is a beneficiary of an IRA, then the Trust must include certain provisions to take advantage of paying IRA distributions over the life expectancy for individual beneficiaries of the Trust. Naming a charity as a beneficiary of a Trust may shorten the deferral time for the individual beneficiaries of the Trust.  Thus, if you want to make a charity a beneficiary of Trust, which is itself a beneficiary of an IRA, you have to be VERY careful how the Trust is drafted. You may also have to distribute the charity’s share within a limited time frame after the decedent’s death.

If an IRA is payable to the Trust, and the Trust provides that a sum of $50,000 is payable to the charity, such a devise is known as a “pecuniary” (or fixed amount) devise. If a taxpayer uses a distribution from the IRA to satisfy such a pecuniary devise, then such a distribution will create income at the TRUST level and not at the charity level (where the income would not be taxable).

In Private Letter Ruling (“PLR”) 201438014, the taxpayer created a Trust which provided that 2 charities were to receive pecuniary devises. Unfortunately, the monies outside the IRA that were payable to the trust were not enough to satisfy such pecuniary devises. Therefore IRA proceeds had to be used to pay such amounts. The taxpayer also went to court and reformed the Trust to include provisions in the Trust to ensure that the payments of the IRA to the charities would not accelerate income and that such payments would qualify for a Trust charitable deduction.

Unfortunately, the IRS stated that the satisfaction of the pecuniary devise with IRA proceeds accelerated income at the TRUST level. The Trust did not receive a charitable deduction because the Trust did not specifically authorize the payment of the pecuniary devise to charity from gross income of the Trust (a requirement to receive the charitable deduction). Further, because the reformation was to ONLY obtain tax benefits, and not to resolve a conflict, the reformation was disregarded.

In PLR 201444024 a Trust was named beneficiary of the IRA. The Trust provided that after 2 pecuniary bequests were satisfied, the remainder was to be distributed to a charity. The taxpayer wanted to be sure that the transfer of the IRA to the charity would not accelerate income at the Trust level. The IRS determined that the distribution of the IRA to the charity would NOT accelerate income. The IRA could be transferred as an inherited IRA in the charity’s name and the distributions would be payable to the charity as the charity received payments.  Note that in this ruling, the IRA was NOT used to satisfy a pecuniary bequest.

ADVICE: Be VERY careful when naming a charity as the beneficiary of a Trust which is itself named as a beneficiary of an IRA. The simplest alternative is to  name the charity as the designated beneficiary of the IRA and bypass the Trust. IF you name a Trust a beneficiary of an IRA which names a charity as a beneficiary, make sure that the Trust is drafted so there is no acceleration of income, and, if desired, the charitable distribution qualifies for the charitable income tax deduction.

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