Can a charity be a beneficiary? Leaving your assets to an organization

Charitable giving is important to you, so you regularly donate to your favorite charities. As you get older and think about the legacy you want to leave behind, you may wonder: In addition to family members, can a charity be a beneficiary?

Yes—by naming a charity or organization as a beneficiary on a retirement account, life insurance contract or other asset, you can continue to make a positive impact in your community even after you pass away. As an added bonus, you may be able to leverage tax benefits. Here's how the process works.

While you're likely familiar with the ins and outs of leaving assets to family members, charities and other organizations also can be beneficiaries. This nonliving beneficiary is known as a "not designated beneficiary." You can name a charitable entity as the beneficiary of assets including:

• Retirement accounts, like an individual retirement account (IRA), a 401(k) and a 403(b)
• Life insurance cash value or death benefits
• Annuities
• Bank accounts
• Brokerage accounts
• Real estate
• Automobiles

You might name the charity as a direct beneficiary using forms from your insurer or custodian. But you also can create a donor-advised fund and name it as a beneficiary. Then, the fund distributes assets to organizations you select based on your recommendations (possibly for many years after you pass). You don't have to use a trust; you can name both individuals and charities as primary beneficiaries. It should be noted that naming a trust as a beneficiary on a retirement account when there is a non-designated beneficiary named in the trust can complicate how RMDs are calculated.

You often can combine different beneficiaries, so you might name both your children and charities as partial primary beneficiaries of a trust. You also can designate contingent beneficiaries to receive assets when a primary beneficiary predeceases you. If you chose to, you could name your children as beneficiaries of your life insurance and designate a charity as the beneficiary of your IRA. Moreover, you can specify exactly what each beneficiary receives, such as:

• A percentage of assets
• A specific dollar amount
• Particular assets (like your home)
• Any remaining assets

Your donation strategy is unique to you, but it can help to understand what others have done.

Consider Thrivent's client Diane Jaeger. After losing her husband to cancer and receiving an unexpected inheritance from her sister, Jaeger saw an opportunity to help her church with $1 million in donations. Working with her financial advisor, she created a donor-advised fund through Thrivent Charitable and named the fund as the beneficiary of a life insurance contract. At her death, the contract pays into the fund, which she has advised to support the church for many years to come.

In another example, a couple who partnered with Thrivent Charitable decided to leave their pretax IRA (which any living beneficiaries would otherwise have to pay taxes on) to a donor-advised fund. This fund supports their church and two other charities. The couple's other assets that weren't assigned to the fund go to their children through their will.

In some cases, you can get a tax deduction when adding assets to a donor-advised fund. That was the case for Jaeger. She paid premiums on the life insurance contract, and each payment offered a modest deduction.

Can you name an organization as a beneficiary and get a tax deduction? It depends. Simply naming a charity as a beneficiary of your IRA or life insurance might not offer immediate benefits. But giving money to charity could reduce the size of your taxable estate, which may be beneficial.

Naming a charity as a beneficiary also can provide flexibility, as you can still use the assets. If you end up needing extensive medical care, you still may be able to use money in your IRA or other accounts before death.

You also can use creative strategies such as a qualified charitable distribution (QCD) to manage taxes during your life. For example, if you're taking required minimum distributions (RMDs), you can send those distributions directly to a qualifying charity. That way, those distributions might be excluded from your income, leaving you with more resources to give. Anyone 70½+ can use this strategy, and if you happen to be subject to RMDs the distribution counts toward your RMD. This strategy is available for individuals with Inherited IRAs as well, as long as they are 70½+. Specific rules apply in order for it to be a non-taxable distribution.

Reviewing your plans with tax and legal professionals who are familiar with your situation is critical. You might not qualify for deductions, or you might need to meet specific requirements, and your certified public accountant can help you navigate those waters.

Leaving assets to a cause you value can be fulfilling and make a meaningful impact. One of the easiest ways to do that is to name charitable organizations as beneficiaries. And if you use a donor-advised fund, you can provide guidance that directs distributions even after your death.

You have many options for designing a strategy, and it's important to move forward in a way that's aligned with your values. Consider connecting with a financial advisor to explore the different ways to pursue your goals. Together, you can review your situation and identify the next steps toward making a difference.