Jenifer S. Schembri, Esq., Florida Board Certified in Tax Law

As most people know, funds distributed from a traditional, non-Roth, Individual Retirement Account (IRA) are subject to income tax, and this also applies to inherited IRAs. Using your IRA to fulfill your charitable goals is often a good strategy both to achieve charitable goals and to lessen the IRAs income tax burden.

Lifetime Charitable Contributions
During your lifetime, the options to use your IRA for charitable contributions include:

Withdrawing funds from your IRA, paying the income tax followed by a charitable contribution and potentially a charitable deduction depending upon other factors on your income tax return. In most cases this strategy will not result in a matching charitable deduction to offset the income from the IRA distribution and therefore is not recommended unless you qualify for a Qualified Charitable Donation.

Once you have attained age 70½, you may direct your IRA to distribute up to $100,000 per year to one or more charities, also know as a Qualified Charitable Donation. The amount of the Qualified Charitable Donation, (i) can reduce your otherwise Required Minimum Distribution for the year, and (ii) while you are not given a charitable deduction, the funds distributed directly to the charity are not income to you and therefore you avoid the mismatch discussed above.

To the extent you regularly donate to charity and you are required annually to satisfy your Required Minimum Distributions, using this strategy will likely result in lower income taxes to you and more funds to the charity. A few caveats in order to take advantage of the Qualified Charitable Donation rules include: (i) the funds must be distributed directly from the IRA account, and (ii) the funds can only be donated to a 501(c)(3) and cannot be donated to a private foundation, supporting organization or donor-advised fund.

Charitable Bequests
While we find that most clients are aware of the benefits of the Qualified Charitable Donation and frequently take advantage of those rules for charitable purposes during their lifetime, many times they have not considered using their IRA’s for charitable bequests upon their death. To the extent that you have an IRA and desire to leave one or more charitable bequests, using your IRA is a tax savings strategy that should be considered.

Upon death, assets that are inherited receive a stepped-up basis for income tax purposes, with the exception of an inherited IRA. The beneficiary of an inherited IRA steps into the shoes of the decedent with respect to the income tax consequences of the IRA account, and as distributions are received from an inherited IRA the beneficiary will be subject to income tax on those distributions. This characteristic of an IRA makes it a good asset to use for charitable bequests.

From an estate tax perspective, the value of the IRA is included in determining your gross estate, however, if there is a charitable beneficiary receiving all or a portion of your IRA, that will result in a direct charitable deduction, reducing your gross estate. There is not the same mismatch as can be incurred for income tax purposes during your lifetime.

From an income tax perspective, the assets that receive the stepped-up basis (the non-IRA assets) can be directed to your non-charitable beneficiaries and the IRA assets directed to the charity will pass to the charity without any income tax consequences as the charity is a non-profit organization. Also, the restriction that limits the use of a Qualified Charitable Distribution to a donor advised fund does not apply to a charitable bequest and therefore the beneficiary of the IRA could be a donor advised fund that includes your specific directions on the causes and/or charities you would like to support.

If you have questions on how you can use your IRA for charitable intentions, please contact Estate Planning Attorney Jenifer Schembri at jschembri@blalockwalters.com or call our office at 941.748.0100.