Bequeathing an IRA to charity is one way to do good and reduce a taxable estate: Your estate gets a charitable deduction for the value of the gift, and the charity can sell the IRA's assets free of income taxes.
There are several ways to leave IRA assets to charity, but no tax-free way to give an IRA away while you are alive. If you do, you'll get a charitable deduction in the year you make the gift, but the IRS may treat the gift as a prohibited transfer and tax it as if you had cashed it out on Jan. 1. So to keep the transfer simple, stick to after-death, testamentary gifts.
If you plan to donate the entire IRA, name the charity as sole beneficiary of the account. If the transfer goes through your estate, income-tax liability is transferred to the charity.
In the past, naming a charity as designated beneficiary of an IRA carried a big penalty because it required you to withdraw more from your account each year than if you had named a person. Under current rules, your required minimum distribution is the same whether you name a person or a charity.
Suppose you want your IRA to be split after your death between your son and a charity. You must set up separate accounts within the IRA for each beneficiary, or the IRA will pass to your beneficiaries under the harsher IRS "multiple-beneficiary rule." The rule says that only individuals or qualifying trusts have a life expectancy for purposes of stretching out distributions after an IRA owner's death.
If you name a non-individual beneficiary, such as a charity, the assets must be paid out either over the five years following your death (if you die before your required beginning distribution date), or over your remaining life expectancy (if you die after your required beginning date). This defeats one of the benefits of an IRA a payout period based on the beneficiary's life expectancy.
If you set up separate accounts, says Douglas Moore, the national director of estate and charitable planning at Citigroup Private Bank, the charity receives its share after your death, and your son can continue benefiting from the IRA's tax-deferred status by taking required withdrawals based on his remaining life expectancy.