How to Leverage Your IRA for Charitable Impact

by Wayne Olson

Going through the challenging and important process of estate planning, it’s easy to dwell on where charitable donations should go. Just as important, however, is to determine which assets should be used for which purposes.

This was brought home to me and my wife Sandy Miller earlier this year when we took some time to revise our estate plans, including the amounts intended for charitable causes.

We had already established a donor-advised fund (“DAF”) account with DonorsTrust, which will manage our philanthropic legacy through its Whitney Ball Legacy Society, so we took the opportunity to revise the Donor Intent Statement related to our account. This statement details our instructions to DonorsTrust for supporting education, policy, and arts groups that advance the causes we care about, so it was important to bring it up to date with our current wishes.

While we were focused on that, however, we learned about major changes to how the tax code treats inherited IRAs since we last reviewed our plans. Formerly, our children could have used an inherited IRA as a nest egg for their own retirement, deferring taxes until then. Now, they must use the funds and pay tax at ordinary income rates on the full amount within ten years. (I’m speaking here only of traditional IRAs; inherited Roth IRAs are also subject to the ten-year rule, but the withdrawals are generally not taxable.)

As a result, we decided to designate our DAF account at DonorsTrust as the ultimate beneficiary of 100% of our IRAs and to fund bequests to family members entirely from after-tax assets. We would advise anyone developing an estate plan to consider a similar strategy, to avoid burdening the next generation with a tax liability along with their inheritance. Because of the ten-year rule on IRAs inherited by someone other than a spouse, we think it’s better to use your traditional IRA for philanthropic purposes and your after-tax portfolio for passing on to your children.

Here are the reasons you might consider designating a charity, and particularly a donor-advised fund at DonorsTrust, as the beneficiary of your traditional IRAs:

1) A traditional IRA is a very tax-inefficient way to leave money to your heirs. The funds in a traditional IRA are taxable at ordinary income tax rates when withdrawn, and, because of changes to the tax code in 2019 and 2022, non-spouse heirs (with a few exceptions) must take taxable distributions within ten years. Most heirs can no longer “stretch” IRA distributions over decades, meaning they will likely have to take larger distributions in the foreseeable future, pushing them into higher tax brackets.

2) A DAF offers flexibility with designating the ultimate beneficiaries. You can amend your Donor Intent Statement with DonorsTrust at any time with a simple email as you change your mind about the merits of various organizations. Changes are much harder to make—not to mention expensive—if the operating charities are specifically designated in your will.

3) A DAF gives you flexibility with your investment portfolio. You can hold alternative investments like private equity funds in an IRA, which is a natural home for patient capital, without the fear that your executor will be forced to sell them into an illiquid market. Instead, if those are assets you plan to give to charity, DonorsTrust can hold onto them after your passing and work with your financial advisor to manage cash flows over time.

4) You can spread out your giving with a DAF. You might hesitate to leave a large lump-sum donation to a nonprofit with a small budget. Some gifts may be out of proportion to the recipient’s current operating level and not easy to digest. DonorsTrust can solve that problem by spreading out your donations over a period of years to make them more manageable for the recipient charity.

For Sandy and me, there is a nice connection between (i) designating our DAF account at DonorsTrust as the ultimate beneficiary of our IRAs and (ii) using Qualified Charitable Distributions (QCDs) from our IRAs during our lifetimes. QCDs flow directly from our IRAs to charitable organizations and reduce the taxable amount of our Required Minimum Distributions (RMDs) dollar-for-dollar, up to a maximum of $111,000 in 2026. In both cases, it gives us pleasure to know that these donations are from funds that we’ve set aside and invested for over forty years–earnings that have never been and never will be subject to tax.

A caveat on QCDs: the tax law does not permit us to direct QCDs to our donor-advised fund at DonorsTrust—they must go directly to operating charities. However, DonorsTrust itself is eligible to receive QCDs, as an operating charity that manages donors’ accounts, and in addition, DonorsTrust has established a program that is eligible for QCDs from your IRA: the Catalyst Portfolio. The funds in this portfolio enable conservative and libertarian donors to pool their support for worthy causes.

As you work with your financial and estate advisors to make charitable legacy plans, Sandy and I would urge you to keep these potential uses for your retirement accounts in mind. A little planning now can save your heirs from a hefty tax bill in the future and free up even more of your wealth for your charitable legacy.

Wayne Olson is the Chairman of the Foundation for Economic Education’s Board of Trustees and serves on the board of directors of the Free to Choose Network and on the Advisory Council of the Atlas Network.

How to Leverage Your IRA for Charitable Impact

by Wayne Olson

Going through the challenging and important process of estate planning, it’s easy to dwell on where charitable donations should go. Just as important, however, is to determine which assets should be used for which purposes.

This was brought home to me and my wife Sandy Miller earlier this year when we took some time to revise our estate plans, including the amounts intended for charitable causes.

We had already established a donor-advised fund (“DAF”) account with DonorsTrust, which will manage our philanthropic legacy through its Whitney Ball Legacy Society, so we took the opportunity to revise the Donor Intent Statement related to our account. This statement details our instructions to DonorsTrust for supporting education, policy, and arts groups that advance the causes we care about, so it was important to bring it up to date with our current wishes.

While we were focused on that, however, we learned about major changes to how the tax code treats inherited IRAs since we last reviewed our plans. Formerly, our children could have used an inherited IRA as a nest egg for their own retirement, deferring taxes until then. Now, they must use the funds and pay tax at ordinary income rates on the full amount within ten years. (I’m speaking here only of traditional IRAs; inherited Roth IRAs are also subject to the ten-year rule, but the withdrawals are generally not taxable.)

As a result, we decided to designate our DAF account at DonorsTrust as the ultimate beneficiary of 100% of our IRAs and to fund bequests to family members entirely from after-tax assets. We would advise anyone developing an estate plan to consider a similar strategy, to avoid burdening the next generation with a tax liability along with their inheritance. Because of the ten-year rule on IRAs inherited by someone other than a spouse, we think it’s better to use your traditional IRA for philanthropic purposes and your after-tax portfolio for passing on to your children.

Here are the reasons you might consider designating a charity, and particularly a donor-advised fund at DonorsTrust, as the beneficiary of your traditional IRAs:

1) A traditional IRA is a very tax-inefficient way to leave money to your heirs. The funds in a traditional IRA are taxable at ordinary income tax rates when withdrawn, and, because of changes to the tax code in 2019 and 2022, non-spouse heirs (with a few exceptions) must take taxable distributions within ten years. Most heirs can no longer “stretch” IRA distributions over decades, meaning they will likely have to take larger distributions in the foreseeable future, pushing them into higher tax brackets.

2) A DAF offers flexibility with designating the ultimate beneficiaries. You can amend your Donor Intent Statement with DonorsTrust at any time with a simple email as you change your mind about the merits of various organizations. Changes are much harder to make—not to mention expensive—if the operating charities are specifically designated in your will.

3) A DAF gives you flexibility with your investment portfolio. You can hold alternative investments like private equity funds in an IRA, which is a natural home for patient capital, without the fear that your executor will be forced to sell them into an illiquid market. Instead, if those are assets you plan to give to charity, DonorsTrust can hold onto them after your passing and work with your financial advisor to manage cash flows over time.

4) You can spread out your giving with a DAF. You might hesitate to leave a large lump-sum donation to a nonprofit with a small budget. Some gifts may be out of proportion to the recipient’s current operating level and not easy to digest. DonorsTrust can solve that problem by spreading out your donations over a period of years to make them more manageable for the recipient charity.

For Sandy and me, there is a nice connection between (i) designating our DAF account at DonorsTrust as the ultimate beneficiary of our IRAs and (ii) using Qualified Charitable Distributions (QCDs) from our IRAs during our lifetimes. QCDs flow directly from our IRAs to charitable organizations and reduce the taxable amount of our Required Minimum Distributions (RMDs) dollar-for-dollar, up to a maximum of $111,000 in 2026. In both cases, it gives us pleasure to know that these donations are from funds that we’ve set aside and invested for over forty years–earnings that have never been and never will be subject to tax.

A caveat on QCDs: the tax law does not permit us to direct QCDs to our donor-advised fund at DonorsTrust—they must go directly to operating charities. However, DonorsTrust itself is eligible to receive QCDs, as an operating charity that manages donors’ accounts, and in addition, DonorsTrust has established a program that is eligible for QCDs from your IRA: the Catalyst Portfolio. The funds in this portfolio enable conservative and libertarian donors to pool their support for worthy causes.

As you work with your financial and estate advisors to make charitable legacy plans, Sandy and I would urge you to keep these potential uses for your retirement accounts in mind. A little planning now can save your heirs from a hefty tax bill in the future and free up even more of your wealth for your charitable legacy.

Wayne Olson is the Chairman of the Foundation for Economic Education’s Board of Trustees and serves on the board of directors of the Free to Choose Network and on the Advisory Council of the Atlas Network.

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