Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

John’s descendants. By an agreement of all beneficiaries and the trustee, including a guardian to represent the unborn descendants, approved by the Probate Court, the charity is paid a reduced sum immediately (equal to the present value of its remainder) and in exchange gives up its $50,000 remainder. In effect, the trust is reformed so that the charitable beneficiary is paid its share in full before September 30 of the year after the year of the participant’s death. A beneficiary who ceases to be a beneficiary prior to that date (due to distribution or disclaimer of its share of the benefits) is not counted as a beneficiary in applying the minimum distribution rules. Reg. § 1.401(a)(9)-4 , A-4(a). The reformation might persuade the IRS (assuming the trust meets all the other trust rules) that the trust qualifies as a see-through. Whether it is effective to provide Dolly’s estate with an estate tax deduction for this charitable gift is a separate question, since as of the date of death, that gift was in the form of a non-qualifying split interest. 7.4 Income Tax Treatment of Charitable Gifts from a Trust or Estate This ¶ 7.4 discusses certain income tax issues involved when retirement plan death benefits are paid to a trust (other than an income tax-exempt trust) or estate, especially whether and how an estate or trust can avoid income taxes on benefits payable to it that are used to fund charitable gifts under the instrument. It does not seek to explain all the rules of trust income taxation. For complete explanation of trust income tax rules, see the following four recommended treatises: Abbin, Byrle M., Income Taxation of Fiduciaries and Beneficiaries (CCH, 2007, 2 vols.). Boyle, F.L., and Blattmachr, J.G., Blattmachr on Income Taxation of Estates and Trusts , 15 th Ed. (2007), Practicing Law Institute, 810 Seventh Ave., New York, NY 10019, www.pli.edu (cited in this book as “ Blattmachr ”). Ferguson, M. Carr, Freeland, James L., and Ascher, Mark L., Federal Income Taxation of Estates, Trusts, & Beneficiaries , CCH/Wolters Kluwer (3 rd Ed. 1999–2010). Zaritsky, H. and Lane, N., Federal Income Taxation of Estates and Trusts , (“Checkpoint” On-line Edition; Warren, Gorham & Lamont) (cited as “ Zaritsky ”). These are cited in this Chapter as “ Abbin ,” “ Blattmachr ,” “ Ferguson/Freeman/Ascher ,” and “ Zaritsky ,” respectively. ¶ 7.4.01 – ¶ 7.4.03 below assume that the fiduciary receives a distribution from the retirement plan and, in the same year, funds a gift to a “public” charity ( ¶ 7.5.01 ) or private foundation ( ¶ 7.5.02 ). If the charitable gift is not funded in the same year the distribution is received from the retirement plan, see ¶ 7.4.04 . If, instead of taking a distribution from the plan and passing the distributed property out to the charity, the fiduciary transfers the retirement plan itself to the charity, see ¶ 7.4.05 . For ease of reading, this ¶ 7.4 will sometimes refer only to trusts; the same rules apply to estates unless otherwise specified.

Introduction to trust income tax rules, “DNI,” and the NIIT

Trusts and estates get a unique deduction on the way from “gross income” to “taxable income”: The trust or estate can deduct certain distributions made to the trust’s or estate’s beneficiaries. § 651 , § 661 . The beneficiaries then pay the income tax on these distributions. § 652 ,