Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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Can the trustee avoid this effect (and shift a higher proportion of tax-exempt income to the daughter) by transferring the IRA, intact, to Charity Y in fulfilment of its bequest (see ¶ 7.4.05 )? Probably not. The IRS would deem the transfer of an IRA to a beneficiary in fulfilment of a pecuniary bequest as a taxable transfer of a right-to-receive-IRD under § 691(a)(2) . See CCM 2006-44020 (discussed at ¶ 6.5.08 ). Accordingly, the transfer would generate $100,000 of gross income (IRD) and the allocation of the trust’s income and distribution deductions would be the same as if the trustee had cashed out the IRA and paid Charity Y from the proceeds. Could these effects have been avoided at the planning stage? There are alternative ways the charitable bequest could have been written that would have produced a little better income tax result for the daughter, but not without producing other “side effects.” One approach would have been to name the charity directly as beneficiary of the IRA up to the amount of $100,000. That would have avoided the hazards and complications of the trust income tax charitable deduction, but it would have created other hazards and complications; see ¶ 7.2.03 . Another way would be to have drafted the charitable bequest of retirement benefits in a way that has “economic effect.” For example, the trust could have said that the charity would receive “the first $100,000 of distributions from the IRA,” and nothing else. If the total IRA was $1 million, the donor would be fairly confident that there would be more than enough money in the IRA to cover the charity’s bequest, so there would be little risk that the charity would actually not get its full $100,000. Unfortunately, by creating “economic effect,” you create the real risk that the economic effects will in fact occur. For example, if the IRA were to be cashed out by the owner on his deathbed, there would be no more IRA payable to the trust, so the charity’s bequest would lapse. The moral is: When retirement benefits are to be paid to charity through a trust or estate, draft the documents to carry out the donor’s intent exactly. If you can accomplish the donor’s objectives and also reduce taxes, do so. However, don’t make changes in the documents for the purpose of reducing taxes if such changes will jeopardize achievement of the donor’s primary goal. This ¶ 7.4.04 deals with when (in what year) a trust or estate may take an income tax charitable deduction under § 642(c) relative to the timing of (1) receipt of a distribution from a retirement plan and (2) the estate’s or trusts’ payment to the charity of the income resulting from that plan distribution. The rules for an estate are slightly different from the trust rules. ¶ 7.4.03 dealt with retirement plan distributions that are paid to a trust and distributed by the trustee to the trust beneficiaries, where the plan-to-trust distribution and the trust-to-beneficiary distribution both occur in the same taxable year of the trust . The exact same rules apply when a retirement plan distribution is paid to an estate, and is then in turn distributed by the executor to the estate beneficiaries, where the plan-to-estate distribution and the estate-to-beneficiary distribution occur in the same taxable year of the estate . If the plan distribution is received in one year, but not distributed to the charity until a later year, then different rules apply (and the results may differ depending on whether the plan distribution was received by a trust or by an estate). The following subparagraphs A–C assume Timing of charitable deduction for trust or estate