If you've planned well enough that you'll have money remaining in your individual retirement arrangement when you pass, you can decide who will receive the account after your death. Leaving the IRA to your church is not only possible, but it also has a number of potential tax benefits for both your estate and your heirs.
IRAs pass based on the beneficiaries you name rather than going through probate. Instead of listing your IRA as an asset in your will, you designate the beneficiary through the financial institution that holds your IRA. You can change your beneficiaries at any time by completing the specific forms that your financial institution requires. For example, if the person you had designed as your beneficiary dies or you just want to leave the money to your church instead, you can complete the required forms and the church will inherit your IRA when you die.
Making your church a beneficiary of your doesn't have to be an all-or-nothing decision. You can leave your IRA to multiple beneficiaries, one of which can be your church. You can do this by designating the percentage of your IRA that each beneficiary will receive. For example, if you wanted to divide your IRA among your two grandchildren and your church, you could specify that your church should receive 40 percent of your IRA and each grandchild would receive 30 percent.
The IRS has rules for when distributions must be taken by a beneficiary that is not an individual, such as a church. The deadline depends on whether the decedent had started taking required minimum distributions from the IRA before he died. If he did, the church must take annual distributions equal to the value of the IRA divided by the decedent's life expectancy according to the Single Life Expectancy table in IRS Publication 590. If the decedent had not started taking the distributions, the church must empty the IRA by the end of the fifth year after his death.
Taxes on Distributions
Typically, IRA beneficiaries also inherit the tax obligations on the distributions from the account. For example, if an individual inherits a traditional IRA, that individual must include that amount as part of her taxable income for the year. However, churches are tax-exempt organizations, so even if the distributions would otherwise be taxable, the church does not have to pay income taxes on the distributions. This can make leaving your IRA to your church a more effective gift than giving other assets.
Read More: Are IRA Distributions Community Property?
Estate Tax Implications
If you have a very large estate, your estate may owe estate taxes when you die. Not all states have an estate tax, and the federal estate tax applies only to estates in excess of the unified credit, so you might not owe estate tax to begin with. The unified credit is available to all taxpayers to offset gift taxes, generation skipping taxes or estate taxes. For example, if you used the entire credit to avoid paying gift taxes during your life, you won't have any left to use against any estate taxes owed. Although the credit varies from year to year, it allows you to avoid taxes on millions of dollars in gifts over your lifetime.
However, bequests left to charities reduce the size of your estate, thereby lowering your estate tax bill. Most churches and other religious organizations are qualified charities, which means that by leaving your IRA to your church, you can reduce your estate tax.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."