Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

that the distribution to the charity meets the other applicable requirements of the income tax charitable deduction (see ¶ 7.4.03 ).

A. Distribution to charity in the next year. If the amount is distributed to the charity in the year (Year 2) following the year the income was received (Year 1), the fiduciary can elect to treat the payment to the charity as if it had been made in Year 1 (and so can deduct it in Year 1). § 642(c)(1) . This rule applies to both estates and trusts. B. Estate gets a set-aside deduction. If the distribution to the charity does not occur until even later than that, things get tougher. An estate can take a charitable deduction for amounts “permanently set aside for” charity as well as for amounts “paid to” charity. § 642(c)(2) . Note: There is no set-aside deduction, even for an estate, for amounts set aside for future distribution to a Charitable Remainder Trust. Reg. § 1.642(c)-2(d) . C. Trust may or may not get set-aside deduction. Trusts, unlike estates, generally cannot take a deduction for amounts that are merely “set aside for” charity; a trust generally gets a deduction only for amounts paid to charity. There are up to three exceptions to this general rule: A trust may take a set-aside deduction if the trust is treated as part of the estate pursuant to a § 645 election (see Reg. § 1.645-1(e)(2)(I) ), or if the trust is eligible for a grandfather exception for certain pre-10/9/69 instruments (see § 642(c)(2) ). PLR 2004- 18040. Finally, if at the time the income is set aside all remaining beneficiaries of the trust are charities the deduction is presumably allowed; this situation is beyond the scope of this book. This ¶ 7.4.05 discusses transferring a retirement plan benefit (for example, an IRA), intact, from an estate or trust to one or more charitable beneficiaries of the estate or trust. This is discussed primarily in the context of avoiding negative results under the “separate share rule” but the technique can also help the fiduciary sidestep some technical requirements of § 642(c) . For example, in PLR 2006-52028, a beneficiary designation form was reformed, after the participant’s death, to name a trust rather than the participant’s estate, as beneficiary of an IRA; all or part of the trust’s residue passed to charities, and the IRS ruled favorably on the transfer of the IRA to the charities as a nontaxable event. Compare CCA 2008-48020, discussed at ¶ 7.4.03 (B). For how to do these transfers, see ¶ 6.1.05 . For the income tax treatment of such transfers, see ¶ 6.5.07 – ¶ 6.5.08 . Transferring part of a retirement plan to a charitable beneficiary prior to the Beneficiary Finalization Date may enable the trust to qualify as a see-through trust for minimum distribution purposes with respect to the rest of the plan (or other retirement benefits); see ¶ 7.4.05 . Other than this minimum distribution deadline, there is no particular date by which the transfer must occur in order to “work” for the income tax purposes discussed here. When the separate share rule of § 663(c) applies, if a fiduciary distributes money to a beneficiary, that distribution will carry out DNI only to the extent there is DNI that is properly allocable to that particular beneficiary’s “separate share”; see ¶ 6.5.05 – ¶ 6.5.06 . Transfer benefits to charity to avoid “separate share” and other rules