Have a traditional IRA? Don’t make these mistakes with your charitable beneficiary designations

If you are like most people, your retirement account is one of the largest assets you own. Deciding what will happen to the funds remaining in that account after your passing is a critically important decision.

Because retirement assets are often heavily taxed when they are left to (non-spouse) family members or other loved ones, it makes sense to earmark these assets for charitable use. This creates a legacy gift that is both tax-efficient and supports causes that mean the most to you.

Naming a qualified charity, like Drexel University, as a beneficiary of your traditional retirement account is simple to do and one of the easiest ways to make a significant impact well beyond your lifetime. However, there are some common mistakes you will want to avoid:

Mistake #1: Naming Incorrect or Unidentifiable Beneficiaries

The charity named on the beneficiary form provided by the retirement plan administrator should match exactly the legal name of the intended organization. Just as family members can have similar names — like a father and son who are a “Sr.” and a “Jr.” — charitable organizations can also have confusingly similar names that are actually legally distinct. This is especially true for organizations with numerous affiliates, such as large hospital systems, national charities and educational institutions. And the beneficiary name matters. If, after your death, there is any confusion about which charity should receive assets from your account, your retirement plan administrator may choose the wrong organization.

You can take two important steps to avoid confusion:

• Let the charity know that your gift is coming! The organization may have a form, such as Drexel’s bequest intention form, that allows you to declare your non-binding intention to make the gift. This is important because retirement plan administrators are not legally obligated to notify charities when assets become available. If you notify the charity ahead of time, it allows the organization to recognize you for the gift during your lifetime and positions the charity to follow up with your plan administrator after your death.
• Make sure that you ask the charity for their legal name, address and tax identification number so you can include this information on the beneficiary designation form. This will help ensure that your gift goes exactly where you want it to go.

Mistake #2: Designating a Specific Dollar Amount Instead of a Percentage of the Remainder

Some donors want to be 100% certain that a charitable organization will receive a specific amount and, to accomplish this, they may state that amount on the beneficiary form. While this may not be an issue for retirement accounts with balances significantly higher than the designated amount, it could be problematic if the account’s remainder is very close to or even lower than that amount.

For example: Let’s say you designate a specific gift of $75,000 for Drexel University and the remainder for your niece, and then your retirement account balance takes an unexpected loss on investments. If the balance at the time of your death is less than $75,000, the plan administrator may interpret the designation in a way that eliminates Drexel, since the amount does not meet your exact dollar-amount specifications. If your plan was to support Drexel with at least some of the assets, then the gift will be unsuccessful.

What to do instead:

A more effective beneficiary designation is one that awards each beneficiary a percentage of the retirement account’s remaining assets. If the account does very well, each beneficiary shares in the increased value. Alternatively, if there are losses, all beneficiaries receive at least some assets, even if the total value is less.

If it is important to you that a beneficiary receive a specific dollar amount, rather than a percentage, it’s essential that you confirm this with your plan administrator. It may require you to provide written instructions.

Mistake #3: Omitting Spousal Consent

Employer-sponsored retirement plans are usually subject to federal spousal rights. Upon the death of an account holder, the spouse may be automatically entitled to 50% — or even 100% — of the retirement account’s remaining funds, regardless of what the beneficiary designation form may say. To protect the spouse’s interest as the primary beneficiary, the law requires the account holder to seek the spouse’s written consent to include any other beneficiary designation. This requirement may even apply when the account holder only wants to leave a portion of the assets to someone other than a spouse. Without this written consent, the plan administrator may not honor the beneficiary designation.

Find out what your retirement plan requires:

Reach out to your financial or legal advisor or your retirement plan administrator to determine whether a spousal waiver is required for beneficiary designations for your retirement account.

If charitable giving is part of your personal legacy plan, naming a charity as a beneficiary of retirement assets is one of the most tax-efficient and impactful ways to support the causes you care about. Completing your plan’s designation form in the correct way will reduce administrative complexity and ensure that those assets are distributed as you intend.

Questions? Contact David Toll, JD, senior associate vice president in Drexel University’s Office of Gift Planning at 215.895.1882 or giftplanning@drexel.edu.