How to Leave a 401(k) to Charity

Also unlike IRAs, a 401(k) requires a client’s spouse to consent to naming anyone other than the spouse as a beneficiary, so the applicable spousal waiver will need to be obtained and properly executed. If the plan sponsor does not allow for a charitable beneficiary to be named, the client should plan to execute a tax-free rollover of the 401(k) account to an IRA when it makes economic sense so that he or she can have full control over naming the beneficiary.

However, if a client is married, you should check first if the client’s spouse is 10+ years younger than the client. If so, keeping the spouse as the primary beneficiary will allow the client to reduce their RMD, since they can use the more favorable joint life expectancy table to figure the RMD amount, thus lowering their income tax liability annually. A workaround in this case is to keep the spouse as the primary beneficiary, name the charity as the secondary beneficiary, and have the spouse agree to disclaim their interest in the 401(k) should this be necessary. In such cases, a DAF works well, since the surviving spouse retains the ability to direct those charitable assets over their lifetime to fulfill their lifetime giving goals, while still receiving the immediate full income tax and estate tax benefits.

Another difference with 401(k)s is that the plan account can’t be divided into multiple accounts for different beneficiaries, as can be done with IRAs. If a client wishes to leave only a part of a large 401(k) to charity, the division has to be done on the beneficiary designation form. If this becomes necessary, it is important to note that, after death, the charity’s portion of the 401(k) must be fully paid out by September 30 of the year following death, or else the non-charitable beneficiaries will lose the ability to stretch out their distributions over their lifetime.

Retirement plan assets like a 401(k) can be leveraged significantly to fulfill a client’s charitable giving goals, since initial contributions reduce taxable income, earnings are tax-free, and distributions to a charity are tax-free while also providing a deduction for estate tax purposes. Every conversation with a client about planned charitable giving should consider how to deploy these assets if possible. It will fulfill the common goal of maximizing the benefit to the charitable organization, while accruing tax savings to the client’s family.

Dawn Jinsky is a CPA, CFP® and a partner in Plante Moran’s Wealth Management group. She leads the firm’s wealth transfer practice, which includes both the estate and business transition practice. With more than 20 years in wealth management, she specializes in estate planning, wealth transfer, charitable planning, and assists family business owners with their transition plans. Dawn is a member of AEF’s Council of Advisors.

Rebecca Solomon is a senior manager in Plante Moran’s Wealth Management group. She received her J.D. from Michigan State University College of Law in 1995, and her LL.M. in Tax from Wayne State University School of Law in 1999. She specializes in tax-focused estate planning, wealth transfer compliance, business succession planning, and family office solutions.

This article originally appeared in AEF Insights earlier this month.

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