Naming charities and non-individuals as beneficiaries

Naming an organisation rather than an individual as beneficiary is straightforward in principle and carries specific consequences worth understanding.

Why the asset choice matters

The single most efficient structure is to name a charity as beneficiary of a traditional retirement account.

The charity pays no income tax on the distribution. An individual would pay ordinary income tax on every dollar.

Meanwhile, taxable assets left to individuals generally receive a basis adjustment eliminating capital gains tax.

So the same overall gift, allocated this way, delivers more to both the charity and the family than the reverse allocation.

Arranging it costs nothing beyond completing a beneficiary form.

The mixed beneficiary problem

A technical point with practical consequences.

Where a retirement account names both a charity and individuals as beneficiaries, the presence of a non-individual beneficiary can affect the distribution options available to the individuals.

The general solution is to split the account into separate accounts by a specified deadline, or to name the charity as beneficiary of one account and individuals of another.

Keeping them separate from the outset is simpler and avoids the deadline entirely.

Getting the name right

The most common practical failure.

Organisations have similar names, operate through affiliates, merge and occasionally dissolve.

A designation naming a well-known charity generically may be ambiguous between a national body and a local chapter, which are frequently separate legal entities.

The designation should include the full legal name, the address, and the organisation's identifying number.

Contacting the organisation to confirm the correct entity takes a phone call and prevents a genuine problem.

Providing for change

Organisations do not last forever.

A gift-over provision — directing what happens if the named organisation no longer exists or has changed substantially — prevents the gift failing.

Alternatives include naming a category of organisation with a mechanism for selection, or naming a donor-advised fund which can then direct grants.

Where a will is involved rather than a designation form, courts in most states can apply a doctrine directing a failed charitable gift to a similar purpose, though relying on that is worse than drafting for it.

Donor-advised funds as beneficiary

A structure worth knowing about.

Naming a donor-advised fund as beneficiary of a retirement account allows the tax advantage while deferring the choice of which organisations ultimately receive grants.

Successor advisers — frequently children — can then direct grants over time, which involves the next generation in the giving.

The important limitation: qualified charitable distributions made during life cannot be directed to a donor-advised fund. That restriction applies to lifetime distributions, not to a beneficiary designation taking effect at death.

Other non-individual beneficiaries

Trusts, which are covered elsewhere on this site and require specific conditions to be met for favourable distribution treatment.

An estate, which is generally the least favourable choice for a retirement account, producing a compressed distribution period and reintroducing probate.

Naming an estate is occasionally deliberate, to provide liquidity for expenses, and it should be a considered decision rather than the default when no beneficiary is named.

Businesses and other entities, which are possible and unusual outside specific arrangements.

Telling the organisation

Worth doing.

Many organisations have legacy programmes, and advance notice allows them to plan and to acknowledge the gift during your lifetime.

It also allows any restriction you intend to be discussed, since a restriction the organisation cannot accept results in a gift that fails.

Some donors prefer anonymity, which organisations will respect.

Telling the family

The other conversation.

Substantial charitable bequests occasionally produce surprise and resentment, particularly where the amount is large relative to what individuals receive.

Explaining the intention during life removes the discovery and generally the objection with it, and it is a considerably better outcome than a family learning of it from an executor.

Partial designations

A useful and under-used option.

Most institutions permit a percentage split rather than requiring a single beneficiary.

Which means a retirement account can be divided between a charity and family members by percentage, without needing separate accounts.

The caution noted above applies: the presence of a non-individual beneficiary can affect the distribution options available to the individuals, and splitting into separate accounts by the relevant deadline addresses it.

Where the charitable share is intended to be a fixed amount rather than a proportion, a separate account holding approximately that sum is generally cleaner than a formula.

General information only, not legal or tax advice. Consult a qualified estate attorney and tax professional about your own circumstances.