Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

DNI deduction, retirement benefits, and charity

A retirement plan distribution received by a trust becomes part of the trust’s “distributable net income” (DNI) to the extent the distribution is includible in the trust’s gross income. See Reg. § 1.663(c)-5 , Examples 6 and 9. If the trust has more than one beneficiary, the extent, if any, to which the trustee can allocate this DNI to the beneficiary(ies) of the trustee’s choice may be determined under the separate share regulations; see ¶ 6.5.05 – ¶ 6.5.06 . There is no DNI deduction allowed for a distribution from an estate or trust to a charity . § 651(a)(2) , § 663(a)(2) . Although the Code could be interpreted to mean that a trust can take a DNI deduction for distributions to charity that do not qualify for the charitable deduction, the IRS has not interpreted it that way. See Rev. Rul. 68-667, 1968-2 CB 289. The courts have supported the IRS; see Blattmachr , § 3:2.1[J], Note 174; Ferguson/Freeman/Ascher § 6.10, in which the authors argue that the IRS regulation may be invalid, as the potential abuse it sought to prevent has been obviated by the statutory change that made the separate share rule (see ¶ 7.4.05 ) applicable to estates as well as to trusts; and Zaritsky, ¶ 2.04[6]. Accordingly, if the distribution to charity does not qualify for the charitable deduction under § 642(c) it will not be deductible at all . A distribution to a charitable remainder trust ( ¶ 7.5.04 ) is eligible for the DNI deduction, to the extent it meets the other requirements of that deduction. Reg. § 1.664-1(a)(5)(iii) . Addition of the 3.8 percent NIIT on the trust’s undistributed net investment income (see discussion in previous section) adds a further complication. Unlike individuals, trusts and estates do get to reduce their taxable “undistributed NII” by amounts of NII distributed to charity. The distribution must qualify for the fiduciary charitable deduction under § 642(c) (see next section. If the trust or estate has both NII and excluded income, the deduction must be allocated between them “as if” NII were gross income and excluded income constituted amounts not includible in gross income (see ¶ 7.4.03 (F)). Reg. § 1.1411-3(e)(4) . Since a distribution to a charity is not eligible for the DNI deduction ( ¶ 7.4.02 ), a distribution to a charity from an estate or trust is deductible, if at all, only as a charitable deduction under § 642(c) . § 642(c) allows an estate or trust “a deduction in computing its taxable income…[for] any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a” charitable purpose (as defined in § 170(c) ). A distribution from an estate or trust to a Charitable Remainder Trust is not eligible for the income tax charitable deduction; it is deductible, if at all, only as DNI ( ¶ 7.4.02 ). Reg. § 1.642(c)- 2(d) ; § 1.664-1(a)(5)(iii) . A. Introduction to § 642(c): the fiduciary charitable deduction. Like an individual taxpayer, a trust is entitled to an income tax deduction for certain payments to charity. However, there are many differences between the individual income tax charitable deduction under § 170 and the fiduciary income tax deduction under § 642(c) ; for example, Charitable deduction under § 642(c)