By Dan Moisand
Miramax/Courtesy Everett Collection
Q: I have no spouse or kids but I do have local organizations I’d like to benefit. I see that I cannot make an IRA donation to a donor-advised fund. Does that mean I can’t leave the IRA to one either?
A.: You are correct that qualified charitable distributions (QCD) to a donor-advised fund while you are alive are not permitted. A QCD is a direct distribution by an IRA owner over age 70½ to a qualified charity. The check is made payable to the charity not you. The amount donated counts toward the required minimum distribution (RMD) from the IRA but is completely nontaxable. It is in effect a 100% deductible even if you do not itemize.
To donate IRA money to a donor-advised fund (DAF) while alive, you must first take a distribution then cut a personal check to the charity. That donation is not going to be fully deductible unless, exclusive of the donation, you have enough deductions to itemize.
You can name a DAF the beneficiary of your IRA but the process is similar to that I just described when donating while alive. Normally, when you distribute at death to a qualified public charity, the charity receives a 1099-R form recording the taxable income from the IRA distribution. The charity accounts for this income on its tax returns but as a nonprofit, no taxes should be due.
Donor advised funds are treated differently. In such a case, when you pass away, the IRA is considered distributed to you and your tax ID number will be on the 1099-R. Your executor will then report the taxable income on your final tax return and on that return claim a charitable deduction on Schedule A. Whether the deduction will fully offset the taxes is dependent upon all of the other items that go on your return.
A donor-advised fund is sometimes referred to as a sort of mini-foundation. It is a charitable entity you create and fund. You, as the donor, advises the fund about which charities the fund will give money via grants. Technically, the DAF doesn’t have to go along with your advice but that is rare. That technicality is a key to why the DAF has much less onerous reporting, management, and administrative requirements than a private foundation. The ease of establishing and running a DAF makes them available to just about anyone.
Most financial services firms will help you set one up with them or you can go to your local community foundation. Community foundations are excellent places to go when you want to focus on local impact. They are experts on the local nonprofits.
Because of the possibility of taxation on the IRA funds when left to a DAF, many benefactors instead look to leave IRA money directly to various charities and work with those charities to determine the administration of the funds. Most large charities have endowments that can accommodate regular disbursements to worthy recipients. You should discuss the details with your advisers to create a plan that best suits your intent.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line .
Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity .