Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

7.6.05 Gift of other low-tax lump sum distribution “NUA” is not the only special tax deal available for qualifying lump sum distributions (LSDs). An LSD to a participant who was born before January 2, 1936 (or to the beneficiaries of such a participant) qualifies for a special tax treatment under which the distribution is excluded from the recipient’s gross income and taxed under a separate rate schedule. This schedule would typically produce a lower-than-normal tax on LSDs up to a few hundred thousand dollars. See ¶ 2.4.06 . The special tax treatment for LSDs has a mixed effect on charitable giving. The effect may be favorable: Since the LSD is excluded from the recipient’s gross income, the recipient may be able to pay the low LSD rate on the distribution, give the distribution to charity, and deduct the gift from his other income, thus saving taxes at his regular income tax rate. Or the effect may be unfavorable: If the distribution is large enough, excluding it from gross income may cause a large charitable gift to exceed the percentage-of-AGI limits on charitable deductions ( ¶ 7.6.01 (A)). 7.6.06 Give ESOP qualified replacement property to CRT The Code allows a business owner, if various requirements are met, to sell stock of his company to an “employee stock ownership plan” (ESOP), then reinvest the proceeds in marketable securities (“qualified replacement property”), without paying income tax on the sale. § 1042 . The untaxed gain carries over to the qualified replacement property and the capital gain tax thus deferred will be paid when the taxpayer “disposes of” the qualified replacement property. A disposition of the qualified replacement property “by gift” does not trigger this recapture provision, but since the Code doesn’t define “gift,” there is some question whether transferring qualified replacement property to a Charitable Remainder Trust (which is not totally a gift if the donor retains an income interest) is considered a gift for this purpose. PLR 9732023 answered this question favorably to the taxpayer involved in that ruling, concluding that “the contribution of the qualified replacement property to the charitable remainder unitrust will not cause a recapture of the gain deferred by the Taxpayers under section 1042(a)....” Unfortunately, even aside from the fact that a private letter ruling cannot be relied on as precedent, the language of the ruling is ambiguous and limited. It says: “In the present case, the transfer of the [qualified replacement property] to the charitable remainder unitrust constitutes a disposition of such property within the meaning of section 1042(e) of the Code. However under the facts of the present case, no gain is realized by the Taxpayers on the transfer...,” with no indication of why no gain is realized. Presumably the rationale is that the transfer is a gift, and therefore excepted from the recognition of gain. 7.6.07 Qualified Charitable Distributions In a year when “qualified charitable distributions” (QCDs) are permitted, an IRA owner or beneficiary who is older than age 70½ can transfer funds directly from his IRA (or inherited IRA, as the case may be) to charity without having the distribution be reportable as a distribution to himself. Here are the limitations and restrictions on QCDs: A. When. Originally enacted as a temporary measure (good for IRA distributions in 2006 and 2007 only), § 408(d)(8) was extended in late 2008 for two more taxable years (2008 and 2009). § 408(d)(8)(F) . In December 2010, § 408(d)(8)(F) was extended for two more years (2010–2011). The American Taxpayer Relief Act of 2012 (ATRA) extended them again ,