Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

373

disclaiming benefits left to it under a trust, but it’s possible to imagine a case where it might work.

Caleb Example: Caleb dies at age 60, leaving his $1 million IRA and other assets to a trust to pay income to David for life, plus principal in the discretion of the trustee for David’s health, support and happiness. On David’s death, the trust is to distribute $25,000 to Harvard College, and the balance of the remaining principal to Rosemary and Gilbert (who are younger than David). Because of the bequest to a nonindividual beneficiary (Harvard), the trust “flunks” the minimum distribution trust rules, and benefits will have to be distributed under the 5-year rule. If this bequest did not exist, the benefits could be distributed over the life expectancy of the oldest trust beneficiary, David, who is only 45. David, Rosemary and Gilbert have always been generous supporters of Harvard, and have named Harvard as beneficiary of substantial bequests in their own estate plans. They meet with Chuck from Harvard’s Planned Giving Office and ask Chuck whether Harvard would like to disclaim the $25,000 remainder bequest under Caleb’s trust. They do not compensate, or offer to compensate, Harvard for making the disclaimer, or make any threat or promise about what they will do or not do if Harvard does or doesn’t disclaim. They simply point out a few facts. First, Harvard wouldn’t be losing much by disclaiming (maximum $25,000, after life of a 45 year-old; the present value of this is much less than $25,000). Second, they remind Chuck that, if the life expectancy payout is not available to the trust, the trust will have less money in it overall, which will mean lower income for David, and less principal available for David, Gilbert and Rosemary. They point out that the less money these individuals have, the less they personally can afford to give to Harvard. Finally, they point out that Harvard’s refusal to disclaim would leave them with a bad taste in their mouths as they see the IRS raid the IRA, and no longer would the name “Harvard” conjure only sweetness and light in their minds. Harvard disclaims the bequest. The trust uses the life expectancy payout method. David becomes Class Gift Chairman for his Harvard 25th Reunion and raises a record amount. F. Trust reformation to make it qualify as a see-through. This is another one to consider if the participant has already died. With proper proceedings in the Court having jurisdiction of the trust, it may be possible to have a noncomplying trust reformed, settled, divided into separate trusts, or otherwise re-engineered so that it complies with the trust rules. While post-death actions to modify a trust are not necessarily effective to cure all “tax defects” in a trust, the IRS has occasionally ruled favorably on see-through status for a trust that was reformed after the participant’s death; see CCA 2008-48020 (discussed at ¶ 7.4.03 (B)), in which the IRS apparently viewed with favor a post-death reformation designed to make a trust qualify as a see-through. More recent rulings, however, show strong IRS hostility towards post-death reformations. See PLRs 2007-42026, 2010-21038.

Here is an example of how a reformation could be used to make a trust qualify as a see- through, if the IRS attitude should thaw:

Dolly Example: Dolly left her $1 million IRA and other assets to a trust that provided life income to Brinley, and on Brinley’s death provided a gift of $50,000 to charity and the balance to John or