It’s good to know what an IRA is, given that so much money comes to charities from IRAs.

An IRA is defined in the Tax Code as:

• a trust
• established in the U.S.
• for the benefit of an individual or his/her beneficiaries
• that meets certain requirements (e.g., is prohibited from investing in life insurance).

That’s pretty straightforward, but the waters run deep here.

For example, who can establish a brand new IRA? The answer is:

• an individual,
• an employer (for the benefit of its employees), or
• an association of employees (for the benefit of its members.

The type of IRA encountered in gift planning is almost always (if not always) an IRA that has been established by an individual.

What happens if the individual who has established an IRA dies?

If there is no named IRA beneficiary, the individual’s estate becomes the beneficiary…not a good situation, because the individual’s estate generally will owe income tax on the IRA money it receives.

If there are one or more named beneficiaries, they are said to inherit the IRA, and the IRA is now an “inherited IRA”. Both individuals and charities can inherit an IRA.

We should stop here and pick up next time. We’re about to enter some very interesting territory, which will involve some fairly deep digging.

Click here to read Part II.

by Jon Tidd, Esq