What About Charities as IRA Beneficiaries?
You may think that it’s a nice thing to leave some of your unused retirement funds to charity when you go. Generally, this a good idea, and your heirs will love you for this as they save taxes.
Assuming you die with $2, $1 in your IRA and $1 in your checking account, your heirs would rather inherit the non-IRA money (the checking account) and have you leave the IRA to charity. If you leave an heir a $1 that was in your checking account, the heir has $1 to spend. If you leave your heir the $1 in your IRA, they must distribute the IRA, pay income tax up to 35% federal and may have only 65 cents remaining to spend. The charity, on the other hand, does not pay tax so it is happy to accept anything you leave. Therefore, if you have left non-IRA money to charity, you may want to change this and leave money to charity from your retirement funds, as it saves your heirs tax dollars on their inheritance.
Why hasn’t your accountant, estate planner or advisor mentioned this? Go figure.
When one of your beneficiaries is a charity, it’s even more important to split the IRA for multiple beneficiaries as we discussed previously. Since a charity has no life expectancy, if your IRA is not split among your beneficiaries, they will all be subject to drain the IRA based on the beneficiary with the shortest life expectancy (in this case zero) and be stuck with the 5-year rule.