When discussing legacy gifts, most assume the conversation is around bequests. Time and time again, surveys have shown that gifts given via a will are the most common planned gift vehicle.
While nonprofits should absolutely be prepared to accept bequests from donors, professionals in these organizations should also be aware how donors’ retirement assets can be used, both in current and legacy giving, to make an impact. Donors can name an organization as a beneficiary on an account, or make distributions to an organization to potentially offset tax implications of taking a required distribution themselves.
In all cases, nonprofit professionals should exercise caution not to appear to give financial or legal advice to their donors; it is a best practice in gift planning for fundraisers to encourage donors to consult with professional advisors to determine what options are best for their needs. (For more on this and other best practices, the National Association of Charitable Gift Planners Model Standards of Practice for the Charitable Gift Planner is an excellent resource.)
Here, we discuss general information on how these charitable gifts typically work.
Charitable organization named a beneficiary of an account
Many employers provide vehicles for retirement savings as an employee benefit, such as a 401(k), 403(b), 457, and other types of accounts. When leaving employment with the company, many employees roll these dollars over into an Individual Retirement Account (IRA).
In either case, the employee chooses beneficiaries to receive the invested assets at the time of the employee’s death. Often, many will choose family members or other individuals. But charitable organizations may also be named a beneficiary on these plans.
Beneficiary designation requires completion of a form with the administrator of the account (such as Fidelity or Vanguard, to name a few) to list primary, secondary, and sometimes tertiary beneficiaries. Individuals and organizations are selected to receive a percentage of what is in the account at the time of realization after the donor passes.
If a donor’s plan is provided through an employer, sometimes they will coordinate with their human resources team to complete the form. Oftentimes, these forms may be completed electronically within an online account portal.
What is important to remember about a beneficiary designation is that it can be updated at any time. Therefore, life-long stewardship of these charitable gifts is critical for their retention.
It is also recommended to encourage donors to notify your organization of inclusion for several reasons. Unlike bequests, beneficiary designations don’t allow the donor an opportunity to direct how the gift will be used in your organization. If a restricted purpose is important to your donor, it is recommended to document these wishes through either a legacy gift form or a gift agreement noting the agreement will be funded by an estate gift of retirement account proceeds.
Also, the future realization of the gift could be tricky; according to a survey conducted by the National Association of Charitable Gift Planners, 43% of organizations encountered challenges in receiving these gifts. NACGP has complied a resource center to help organizations obtain these gifts, which includes articles and sample letters for various administrator firms. This resource is offered free to any nonprofit, regardless of membership status with NACGP.
Notification processes vary among the fund administrators; information may be sent to a business office or finance team in your organization, and not the development office. Knowing that a gift should be coming your organization’s way is helpful to expedite this process internally.
Additionally, as noted in the NACGP advocacy center, some account administrators may request a charitable organization to open an Inherited IRA to receive the funds. This is generally not recommended, as an organization would wish to receive the funds as soon as possible. The administrator may also ask the nonprofit contact for personal information, such as social security or driver’s license numbers. This is where the advocacy center resources are a great guide on how best to proceed.
Qualified Charitable Distribution to a charitable organization
Generally, most retirement plans (including IRAs) require minimum distributions to be taken when the plan participant reaches a certain age. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the age to those reaching 72 (it remains 70 ½ for those who reached this age before January 1, 2020).
What this means is for donors who have reached these age milestones, they must take a Required Minimum Distribution (RMD) from their account, or face a penalty. As funds into these accounts are generally made with pre-tax dollars, they are then typically taxed on this income.
One way donors can potentially reduce their tax liability is by making a Qualified Charitable Distribution (QCD) directly to a charitable organization from their retirement account to satisfy all or part of their RMD, up to a maximum of $100,000 per year. To qualify, funds must be sent directly to the nonprofit from the account administrator. Donors work with their administrator to complete the required paperwork.
For the nonprofit, these are current use dollars and should be used and stewarded like any other cash gift, with the exception of how an acknowledgement/tax receipt is handled. A thank you note should absolutely be sent to the donor; however, a tax receipt should not be sent. This is because the donor will not claim the donation for tax purposes, just as they did not receive the income from the distribution. It typically is not standard practice to send anything to the firm which administers the donor’s retirement account.
It’s important to communicate with donors to determine if they have an intended purpose for the gift. And much like retirement assets received through an estate, it’s also helpful for them to share copies of forms they complete with their administrator so your business office or finance team is aware of the purpose of the contribution.
Organizations should consider sharing with donors and including in communication materials an openness to accepting charitable gifts of retirement assets, both as part of legacy giving and in current giving via QCDs. For questions regarding the tax benefits to the donor, always direct them to their accountant or financial planner.
For continued education, consider exploring educational sessions offered by local NACGP councils or estate planning councils. You also might consider networking with financial planners in your area to call on for guidance as needed.