Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

385

Although § 663(c) states that it applies for the sole purpose of determining the amount of DNI “in the application of sections 661 and 662,” it appears that the separate share rules also apply to determine allocation of DNI to the share of a charitable beneficiary, even though, after all the allocating is done, there will be no DNI deduction for distributions to charity, because:  The separate share rules apply if a trust or estate “has more than one beneficiary, and if different beneficiaries have substantially separate and independent shares....” Reg. § 1.663(c)-1(a) . The regulation does not say the rules apply only if the entity has more than one non-charitable beneficiary.

 The IRS has not provided any other system for deciding how much of the trust’s income is allocated to charitable shares.

 One of the examples in the separate share regulations includes allocation of DNI among both charitable and non-charitable beneficiaries, though noting that the “payments of income to the charitable organization are deductible by the estate to the extent provided in section 642(c) and are not subject to the distribution provisions of sections 661 and 662.” Reg. § 1.663(c)-5 , Example 11.

See also Ferguson/Freeman/Ascher, § 6.10, where the authors assume this result.

If the participant has already died, leaving retirement benefits to a trust that has “separate shares” within the meaning of § 663 ; and the beneficiary(ies) of one or more shares is (are) charities, while one or more other shares have noncharitable beneficiaries; and the trust does not include a provision mandating allocation of the retirement benefits to the share(s) of the charitable beneficiary(ies); the deemed allocation to noncharitable beneficiaries’ shares of gross income arising from retirement plan distributions can still be avoided, in the trust administration phase, if:

1. The trust instrument (or applicable state law) gives the trustee authority to distribute assets in kind to beneficiaries in satisfaction of their shares; and

2. The trust instrument (or applicable state law) gives the trustee authority to pick and choose which asset will be used to fund the charity’s share; and

3. The trustee, instead of taking distribution of the retirement benefits, assigns (transfers) the retirement plan itself to the charity.

Following the assignment, the charity can take distributions directly from the retirement plan. The distributions do not have to be included in the gross income of the trust because the benefits are never paid to the trust. The problem of Reg. § 1.663(c)-2(b)(3) is avoided. This approach also sidesteps a requirement of getting a charitable deduction that applies if the trustee takes a plan distribution, namely, that the instrument must specify that the payment to charity must come out of gross income ( ¶ 7.4.03 (D)).