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Planned Giving

More about IRAs

More about IRAs

When deciding beneficiaries for your various assets, considering the tax implications can make your money go further.  

The income your heirs receive from your IRA is taxable upon transfer at your heirs’ highest tax rate. However, leaving your IRA benefits to a nonprofit like The Circle School incurs no tax liability. That is why choosing to make the school your IRA beneficiary can be beneficial to the school and your heirs.

Take this example: Imagine you have $300,000 in an IRA and $250,000 in stock.  You are trying to decide which to leave to your heirs, and which to donate to The Circle School. Your goal is to maximize benefit to all parties. 

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Option 1:

Leave Stock to Heirs, and IRA to The Circle School

If you leave the stock to your children, they pay no tax on it at the time of inheritance. Your heirs get the entire $250,000. This gift is taxable only when the heirs sell the shares, and only on the gain that occurred from the date of transfer—currently, the highest capital gains tax rate is 23.8%.

If you leave The Circle School the IRA benefit, the school would receive the entire $300,000. No taxes are paid on the gift, because of the school’s tax-exempt nonprofit status.

Option 2:

Leave IRA to Heirs

By contrast, if you leave the IRA to your heirs, they will pay immediate income tax of approximately $110,000 (37%)* on that $300,000. Your heirs receive only $189,000 from this gift.

Leaving the stock to The Circle School benefits the school by $250,000a generous gift, but less than the gift in Option 1.

In sum: By making the school your IRA beneficiary, you may be able to give more to all parties with less.

*These figures assume the beneficiary is in the top income tax and capital gains bracket.

The material presented on this Planned Giving website is not offered as legal or tax advice. Read full disclaimer.