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Charities tend to go where the money is when seeking
donations and a new wellspring is becoming available for them to tap: defined-contribution
plans.
Yet, if you are civic-minded and are thinking
about giving away your defined-contribution account balance, naming a charity as the
beneficiary of your plan may not be the most efficient way to show your philanthropy,
financial planners say.
Americans held $2.45 trillion in trusteed
defined-contribution plan assets in 1998, according to the Federal Reserve Board.
This has not gone unnoticed in the world of charitable
giving. "The amount of money piling up in these plans is incredible, said Tim Sharpe
of Robert F. Sharpe & Co., which helps nonprofits run their charitable giving
campaigns.
"I think we are going to see more and more in
retirement plan gifts" as the first wave of IRA and 401(k) account holders gets
older, he said. Most donations of this type are made by widowed women in their late 70s,
said Sharpe.
While charitable giving is laudable, it may not be the best
thing to do with your 401(k) plan. Employer-sponsored retirement plans are designed to
help workers build a retirement nest egg; they are not designed to be conduits for
charitable donations, financial planners say.
Even so, if you want to name a charity as your primary plan
beneficiary (the one that gets all of your plan benefit when you die), here are some
issues to consider.
Beneficiary Naming Complications
Before naming a charity as your plan beneficiary, you
should make sure that both your needs and your family's needs are taken care of. "You
don't donate to a charity unless you have enough to fund your own retirement and the kids
don't need it any more," said Anthony Anchukaitis, a certified public accountant with
Canby Maloney & Co.
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| Naming a Beneficiary |
While spousal rights aren't a concern with an
IRA, the beneficiary naming rules can still be complicated. This is especially true when
you reach age 70ý, the required beginning date. At that date, you select a formula to
help you take money out of the account. You also select your beneficiary, the number of
lives used in life expectancy calculations and the method of calculating the payments.
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If you are married, naming a charity as your 401(k) plan's
primary beneficiary is somewhat complicated because federal law gives spouses beneficiary
priority over anyone else. To name the charity as a beneficiary, you will need to have
your spouse sign a waiver giving up his or her rights to the money.
If you roll your money into an IRA, you won't have to worry
about the spousal priority. The laws that cover defined-contribution plans don't govern
IRAs.
If you're single, you will have an easier time naming a
charity as your beneficiary.
Distribution Complications
Regardless of whether you are single or married, the
burdensome part of naming a charity as your beneficiary comes in taking distributions.
There are two issues you need to consider.
The first is that many employer-sponsored retirement plans
are not designed to distribute money over time. Plans are often designed to only pay a
lump-sum distribution when the worker reaches retirement, rolls it over to a new plan or
cashes out. The reason is that many employers don't want to deal with the administrative
hassles and costs of calculating periodic payments and maintaining complex custodial
agreements. Whether or not your plan allows for periodic distributions should be spelled
out in your summary plan description.
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"You don't donate to a charity
unless you have enough to fund your own retirement and the kids don't need it any
more."
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— Anthony
Anchukaitis, a certified public accountant with Canby Maloney & Co.
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Second, if you want to stretch out the distributions from
your 401(k) plan while in retirement, naming a charity as your beneficiary could limit
that ability.
Here's why. By April 1 of the year after you reach the age
of 70ý, you will need to name a beneficiary and select an IRS-approved calculation method
to take minimum withdrawals from your plan. This is known as the required beginning date;
this is when you must begin to take required minimum distributions. The complication is
that the choices you make as of April 1 are irrevocable.
For instance, if you select a distribution formula that
requires you to take out all of your money by age 85 but you continue to live into your
90s, you will have to find a source of extra retirement income for those later years.
You can solve this problem by naming a beneficiary whose
life expectancy you can combine with your own, thus extending your payments. A charity,
because it is a corporate entity, has no life expectancy. So, if you name a charity as
your beneficiary, by default you're deciding to use one life expectancy in your
distribution calculations.
If you want to give some money to your spouse and some to a
charity, you and your spouse will likely run into the above problem — all the money
may have to be withdrawn during your life. Further, your spouse may lose the ability to
stretch out the distributions if the spouse and the charity are named as co-beneficiaries.
The IRA Alternative
Instead of naming a charity as your 401(k) plan
beneficiary, you may want to wait until you've reached retirement and rolled your money
into an IRA. By retirement, you should have a pretty good idea of how much money you will
need and how much you can afford to give away.
Giving from an IRA is much easier than giving from a 401(k)
because (with the help of a good estate attorney or financial planner) you can make
changes to your custodial agreements. Through IRAs, you can leave different amounts of
money to different heirs or charities by simply setting up separate accounts for each
recipient. Moreover, charities that receive IRAs as gifts can take the money out without
paying taxes.
Generally, IRAs will offer much more flexibility in
deciding how you want your money distributed after your death. |
