Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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available after the participant’s death (see ¶ 4.2.04 (C); if the problem is discovered while the client is still living, urge the client to roll over the money to an IRA to avert the problem.

 Pecuniary bequests: The foregoing rationale applies to the transfer of retirement benefits, intact, from a trust (or estate) to the residuary beneficiary(ies) of the trust (or estate). This approach is recommended only with respect to a sole residuary beneficiary or (if there are multiple residuary beneficiaries) to any of mults. It may not work with respect to a pecuniary (fixed-dollar) gift or bequest. The IRS Chief Counsel has opined that a trustee’s transfer of retirement benefits in fulfillment of a pecuniary gift (in contrast to a fractional or percentage gift) is treated as a “sale” of such benefits, triggering immediate realization of income to the funding trust under § 691(a)(2) . See Chief Counsel Advice (CCA) 2006- 44020, discussed at ¶ 6.5.08 . Here are guidelines to follow if retirement benefits are to be paid to a trust at the client’s death, and the trust is to make distributions to charities, and you want the gross income resulting from the retirement plan distributions not to be taxable to the trust, and you also want the maximum estate tax benefit for making the charitable gifts. These guidelines assume that all or most of the retirement benefits will pass to charity, so that there is no need to be concerned about preserving a “life expectancy of the oldest trust beneficiary” payout for the trust. Preserving a life expectancy payout for noncharitable beneficiaries under a trust when part of the retirement benefits are to be paid to charity is addressed at ¶ 7.3 .  Specify that no estate taxes are to be charged against or paid out of the charity’s share. This is required IF you do not want the estate tax charitable deduction to be reduced by the amount of the estate taxes paid out of the charity’s share. Since reducing the charitable deduction would further increase the estate taxes, paying estate taxes out of the charity’s share requires a circular calculation to determine the deduction.  Specify that the retirement plan benefits must be used first to fund the charitable bequests , and that nonretirement assets are to be used for this purpose only if there are no other assets available. This assures that the trustee will not be required (by state law equitable apportionment principles, the “separate share rule” of § 663 , or otherwise) to assign proportionate shares of the retirement benefits and other assets to all beneficiaries; see ¶ 7.4.05 .  Specify that the trustee has authority to distribute assets in kind. This will assure that the trustee can transfer the retirement plans directly to the charities to fulfill their shares, rather than being compelled to withdraw funds from the retirement plans and then distribute funds to the charities. See ¶ 7.4.05 . How to name a charity as beneficiary through a trust