Retirement & Financial Planning Report

Your estate plan might call for making charitable bequests from your IRA. For example, on your IRA beneficiary form you could state that 40 percent will go to your son, 40 percent to your daughter, and 20 percent to your alma mater.

Such a strategy, though, can deprive the non-charitable beneficiaries of long-term tax deferral. Generally, an inherited IRA must be distributed over the shortest life expectancy among the beneficiaries. A charity has no life expectancy so this IRA will have to be distributed in a relatively short time.

To avoid this, tell your other beneficiaries to pay the charity its share before September 30 of the year following the year of the IRA owner’s death. If this is done, the charity will not be considered a “designated” beneficiary.

The other beneficiaries can separate the inherited IRA into their own accounts (in the name of the deceased owner) and use their individual distribution schedules. One beneficiary might want to take out the cash, for instance, while another wants to stretch distributions over his life expectancy, maximizing tax-deferred growth inside the account.