When researching tax-efficient ways to support your favorite charities, you’ll quickly encounter a range of strategies, including donating highly appreciated assets to making qualified charitable distributions (QCDs), establishing a donor advised fund (DAF), naming charities in your will and more complex options involving trusts.

While all of these can be effective, there’s one lesser-known strategy that deserves special attention, especially if your estate includes a pre-tax retirement account like an IRA or 401(k). If you intend to leave part of your estate to charity, consider naming the charity directly as a beneficiary of your retirement account rather than making the gift through your will.

Retirement accounts

Certain assets, like retirement accounts and life insurance policies, are not governed by your will. Instead, they pass directly to the beneficiaries named in separate documents provided by your financial institution. These assets bypass probate, so it’s essential to review and update your beneficiary designations to reflect your current wishes.

Tax trap for heirs

Most assets passed through your will or via life insurance are received tax-free by your heirs. Even appreciated assets like stocks or real estate benefit from a “step-up” in basis, allowing heirs to sell them without paying capital gains tax.

However, pre-tax retirement accounts are different. Heirs must pay income tax on every dollar they withdraw. And under current IRS rules, most non-spouse beneficiaries must fully withdraw the funds – and pay the associated taxes – within 10 years of inheriting the account. For someone in the 24% tax bracket, inheriting a $500,000 IRA could mean a $120,000 tax bill. In contrast, inheriting a $500,000 home would result in no tax if sold immediately.

Charities as beneficiaries

Charities, unlike individuals, don’t pay income tax on donations. So whether they receive a $500,000 house or a $500,000 IRA, the financial benefit is the same. In fact, they will prefer to receive the IRA to avoid the hassle of selling real estate.

With thoughtful planning, you can significantly reduce the tax burden on your heirs while maximizing your charitable impact. Naming a charity as the beneficiary of your retirement account is one of the most tax-efficient ways to give at death.

As always, consult a certified financial planner or estate attorney to ensure your strategy aligns with your personal financial situation and goals.

Paul Hansen, a longtime Tri-Citian, is a certified financial planner and certified public accountant at HFG Trust in Kennewick.