Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

379

compare § 664(c) . Therefore, generally retirement plan death benefits paid to a pooled income fund will be subject to income tax in the year received by the fund to the same extent they would be taxable to an individual beneficiary. Accordingly a pooled income fund is not an attractive choice as beneficiary of traditional retirement benefits. Nor is it an optimal choice as beneficiary for a Roth IRA, because it cannot qualify as a see-through trust; see discussion at end of ¶ 7.5.09 . 7.6 Lifetime Gifts of Retirement Benefits This ¶ 7.6 discusses lifetime (as opposed to at-death) charitable giving options for individuals who have money in IRAs and other retirement plans. Most of the considerations discussed here apply to both living participants and beneficiaries (with respect to inherited benefits they hold). 7.6.01 Lifetime gifts from distributions A client who has more money in his retirement plan than he expects to need may wish to give some of it to charity. Generally, the only way he can do this is to first withdraw funds from the plan and then give the funds to the charity. For a temporary exception to this general rule, see “Qualified Charitable Distributions” ( ¶ 7.6.07 – ¶ 7.6.08 ). Withdrawing funds or other assets from a retirement plan generally causes the value of the withdrawn property to be included in the recipient’s income. If the recipient then donates the withdrawn amounts to charity in the same year that he took the distribution, the income tax charitable deduction theoretically should eliminate the tax on the distribution. Unfortunately the following obstacles often prevent the income tax charitable deduction from wiping out the tax cost of the distribution: A. Percent-of-income limit. The income tax deduction for charitable contributions is limited to a certain percentage (30% or 50%, depending on the type of property given and the type of recipient charity) of the individual’s gross income. § 170(b) . If the individual’s donations exceed the deduction limit, the excess can be carried forward for a limited number of years. B. Deduction-reduction for high-income taxpayers. Charitable deductions are an itemized deduction, subject to the “reduction of itemized deductions” that applies to high-income taxpayers in years before 2009 or after 2012. § 68 . The amount of the reduction is a percentage of the donor’s AGI—so the potential reduction is increased by the plan distribution, which increases AGI. The phaseout begins at $250,000 of AGI for single taxpayers ($300,000 for married filing jointly). C. PEP for high-income taxpayers. The personal exemption deduction is phased out under a different Code section ( § 151(d) ) and schedule, again beginning at $250,000 of AGI for single taxpayers ($300,000 for married filing jointly). A retirement plan distribution, by increasing AGI, may cause loss of some or all of the taxpayer’s personal exemption. The charitable contribution does not offset this. D. Deduction decreases taxable income but not AGI. Because the distribution is included in the individual’s gross income, it may increase his taxes in other indirect ways that are