Can I Leave My IRA to Charity and Still Benefit My Family?

By Chuck Roulet, Estate and Elder Law Attorney | Licensed in Florida and Minnesota

The answer is yes — and in the right structure, directing your IRA toward charitable purposes while using other assets for your family can result in your heirs receiving more after-tax wealth than if the IRA had passed to them directly. This surprises most families who hear it for the first time. Understanding why requires a brief look at how IRAs are taxed — and how matching the right asset to the right recipient changes the math entirely.

Why an IRA Is the Worst Asset to Leave to Your Children

An IRA is the single worst asset in your estate to leave to your children from a tax standpoint — and it is worth being specific about why.

Every dollar inside a traditional IRA has been growing tax-deferred, meaning it has never been subject to income tax. When your child inherits the account, every dollar they withdraw is treated as ordinary income in the year they take it out. Under the SECURE Act's 10-year rule, your adult child must withdraw the entire balance within a decade of your death.

On a $1,000,000 IRA, that is $1,000,000 of ordinary income flowing to your children over ten years — on top of whatever they are already earning. At a combined federal and state income tax rate of 30 to 40 percent, $300,000 to $400,000 of that inheritance goes to the IRS rather than to your family. The net inheritance is $600,000 to $700,000 on a million-dollar account.

Your other major assets — appreciated real estate, a brokerage account with a step-up in basis, even cash savings — pass to your children at a dramatically lower tax cost. The IRA is uniquely disadvantaged as an inheritance because of its deferred-tax nature.

Why an IRA Is the Best Asset to Direct Toward Charity

Charities pay no income tax. When a qualifying charity receives an IRA — either as a direct beneficiary designation or through a charitable remainder trust — it receives the full pre-tax value of the account. The same $1,000,000 that would cost your children $300,000 to $400,000 in income tax passes to a charity at $1,000,000 of full, usable value.

The planning principle that follows from these two facts is straightforward: match the asset to the tax-efficient recipient. Direct the IRA toward charitable purposes. Direct your tax-advantaged assets — the home with a step-up in basis, the appreciated brokerage account, the cash savings — toward your children. The family ends up with more. The charity ends up with more. The IRS ends up with less.

Qualified Charitable Distributions — A Simpler Tool for Smaller Amounts

For IRA owners who are 70½ or older, Qualified Charitable Distributions (QCDs) allow up to $105,000 per year to be transferred directly from a traditional IRA to a qualifying charity, completely income-tax-free. The distribution counts toward required minimum distributions for the year but is excluded from gross income entirely.

For families with charitable intent and manageable IRA balances, QCDs are the most straightforward way to direct IRA funds to charity while reducing the taxable income associated with required minimum distributions. They do not require a trust structure or insurance component.

The Charitable Remainder Trust and ILIT Strategy

For families with significant IRA balances, genuine charitable intent, and the goal of maximizing the after-tax wealth passed to children, the most sophisticated structure available combines a Charitable Remainder Trust with an Irrevocable Life Insurance Trust.

Here is how the strategy works — and it is critical to understand that this structure must be implemented during the IRA owner's lifetime:

• While the IRA owner is alive and insurable, the IRA is transferred to a Charitable Remainder Trust. Because the CRT is a tax-exempt entity, the transfer does not trigger immediate income tax on the IRA balance.
• The CRT pays the IRA owner an income stream — typically 5 to 7 percent of the trust value annually — for their lifetime or a fixed term of years. The owner receives this income personally.
• The IRA owner uses the income stream from the CRT to fund a life insurance policy held inside an Irrevocable Life Insurance Trust. The ILIT owns the policy, keeping the death benefit outside the owner's taxable estate.
• At the IRA owner's death, two things happen simultaneously. The Charitable Remainder Trust passes its remaining value — the CRT remainder — to the designated charity or charities. The ILIT pays the life insurance death benefit — potentially two to three times the original IRA balance — to the IRA owner's children, completely income-tax-free and estate-tax-free.

The Numbers — A Concrete Comparison

Consider a family with a $2,000,000 traditional IRA and adult children as the intended beneficiaries.

In Scenario A — the IRA passes directly to adult children. After 10 years of income tax under the SECURE Act's mandatory withdrawal rule, the family nets approximately $1,200,000 to $1,400,000, depending on the children's tax brackets during the distribution period.

In Scenario B — the IRA is transferred to a Charitable Remainder Trust during the owner's lifetime. The owner receives a lifetime income stream, which funds a $3,000,000 life insurance policy held in an ILIT. At the owner's death, the charity receives the CRT remainder, and the children receive a $3,000,000 income-tax-free, estate-tax-free life insurance death benefit.

Same $2,000,000 IRA. In Scenario A, the family receives $1,200,000 to $1,400,000 net. In Scenario B, the family receives $3,000,000 net — plus the charitable gift is made. Both objectives are achieved simultaneously.

For the complete treatment of charitable IRA strategies — including QCDs, CRTs, and the CRT plus ILIT structure — read our full IRA estate planning guide by clicking here.

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Chuck Roulet is an estate and elder law planning attorney at Roulet Law Firm, P.A., with offices in Minnetonka, Minnesota and Venice, Florida. He is licensed in both states and has nearly 30 years of experience helping families protect their homes, life savings, and legacies.

This page is for informational purposes only and does not constitute legal advice. Please consult a licensed attorney about your specific situation.