When most families start thinking about the legacy they’ll leave behind, they want a plan that’s both financially smart and genuinely meaningful. One option that checks both of those boxes is to name a donor-advised fund (DAF) as the beneficiary of an IRA. It’s a simple move that can offer major tax advantages and help ensure your charitable goals actually happen.

 

What Is a Donor-Advised Fund?

A donor-advised fund is a charitable giving vehicle administered by a public charity. Here’s how it works:

• You contribute assets (cash, securities, or even certain IRA proceeds) to the fund. (You can name a DAF as an IRA beneficiary or donate after-tax IRA distributions to it, but you can’t make qualified charitable distributions (QCDs) to a DAF.)

• You receive an immediate charitable tax deduction for the contribution.
• You recommend grants from the fund to qualified 501(c)(3) charities over time.

While you can advise on distributions, the funds are irrevocably committed to charitable purposes – they cannot be used for personal expenses or obligations.

 

Why Beneficiary Designations Matter for IRAs

An IRA (Individual Retirement Account) is a tax-advantaged account designed to help individuals save for retirement. Upon the account owner’s death, the IRA does not automatically transfer to heirs – it requires a beneficiary designation. This designation determines who receives the funds and how they are taxed.

• If an individual is named as a beneficiary, they inherit the IRA and must follow IRS distribution rules.
• If a charity or DAF is named, the IRA passes directly to that entity, often avoiding income tax entirely.

 

General Tax Benefits of Naming a Donor-Advised Fund as IRA Beneficiary

This is where it gets interesting.

When an individual inherits an IRA, every withdrawal they make is treated as taxable income – and those taxes can chip away at the account quickly. But when a charity or a DAF inherits the same IRA, no income tax is owed. That means the full value of the IRA can go directly toward the charitable causes you care about, rather than losing a sizable portion to the IRS.

A DAF also makes ongoing giving much simpler. Instead of managing multiple donations to different nonprofits each year, your heirs can recommend grants from one central account over time. And this approach is flexible; you’re not required to direct the entire IRA to charity. Many people choose to split the account so part goes to their heirs and part goes to a DAF. This lets families blend personal financial goals with long-term philanthropic intentions in a way that feels balanced and intentional. (Note: There are certain rules to be aware of when designating a charity (or other non-natural person) as an IRA beneficiary along with a person. CLICK HERE for more about these parameters.)

Example: Dorothy, Junior, and a $1 Million IRA

Let’s make it real.

Dorothy passes away with a $1,000,000 IRA.

Her son, Junior, earns $600,000 a year and is already in a high tax bracket. He and his wife, Katelyn, donate about $85,000 per year to charity.

Scenario 1: Junior Inherits the IRA

• He has to empty the IRA within 10 years
• Every withdrawal is taxed at 35%
• After taxes, he ends up with around $650,000 to donate – not the full $1 million

He basically loses 35% to the IRS.

Scenario 2: A Donor-Advised Fund Inherits the IRA

Dorothy names Junior and Katelyn’s DAF as the beneficiary.

• The IRA goes straight to the DAF, tax-free
• The full $1,000,000 can support the charities they love
• They can give over time – to their church, alma mater, local nonprofits, or anywhere else that matters to them

They can’t use it for themselves, but they do get full flexibility in choosing how and when to give it away.

 

Things to Keep in Mind

• This strategy only makes sense if the IRA owner or intended beneficiary has charitable intent.
• Once the IRA passes to the DAF, the transfer is irrevocable.
• Beneficiary designations should be reviewed regularly and coordinated with estate planning goals.
• If an IRA owner believes a current beneficiary may want to redirect some or all of the IRA to the beneficiary’s DAF, it’s important to discuss this with the beneficiary first—not simply make the change unilaterally. Open communication ensures alignment with the beneficiary’s charitable priorities and avoids unintended surprises.

 

Bottom Line

By naming a DAF as the beneficiary of an IRA, families can transform a tax-heavy inheritance into a tax-free charitable legacy. For those already committed to philanthropy, this approach ensures that every dollar works toward causes that matter most.

If you’d like to learn more about this strategy – or other ways to align your financial plan with your charitable goals – contact Approach Retirement Advisors, LLC today. Our team can help you design a plan that maximizes tax efficiency and supports the causes you care about most.