Life and Death Planning for Retirement Benefits

388

Life and Death Planning for Retirement Benefits

 Use fractional rather than pecuniary formulas to define the charitable gifts , if possible. This allows the fiduciary to fulfill the gift by transferring the retirement benefits intact to the charity, as described in ¶ 7.4.05 .

7.5 Seven “Whiches”: Types of Charitable Entities

The Tax Code recognizes various types of charities and “split-interest” partially-charitable entities, not all of which are income tax-exempt. This ¶ 7.5 explains which charitable entities are and are not suitable to be named as beneficiaries of traditional (taxable) retirement plan death benefits.

Suitable: Public charity

§ 501 provides an income tax exemption for a lengthy list of organizations, including clubs, burial societies, employee benefit plans and, in § 501(c)(3) , the type of organization people usually mean when they refer to “charities”: “Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve [sic] the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual,” and which does not engage in certain proscribed political activities. The definition is similar, though not identical, for § 2055(a)(2) (estate tax deduction for bequests to charity). These organizations are referred to in this Chapter as “public charities,” meaning 501(c)(3) organizations that are not private foundations ( ¶ 7.5.02 ). A public charity is exempt from income tax (except for the tax on “unrelated business income” or “UBTI”). § 501(a) , (b) . Bequests to public charities qualify for the estate tax deduction, up to the value of such property included in the gross estate. § 2055(a) . Lifetime gifts to such charities are deductible for gift tax purposes ( § 2522(a) ). Lifetime gifts to domestic charities qualify for the income tax charitable deduction. § 170(a) . Gifts to some charities qualify for a larger deduction (as a percentage of the donor’s gross income) than others, but this distinction is irrelevant to at-death gifts. Making a bequest of retirement plan death benefits directly to a public charity presents the fewest problems. The planner needs to verify that the organization is an exempt organization under § 501(c)(3) and for a major gift the planner should review each of the Code sections under which a deduction will be claimed, to make sure that the organization in question meets the requirements. This is not generally a problem in the case of gift by a U.S. citizen to typical charities.

Suitable: Private foundation

In general, a private foundation is a “501(c)(3) organization” ( ¶ 7.5.01 ) that is primarily supported by contributions of one donor or family. However, the definition of a private foundation is notoriously convoluted (see § 509 ), especially since there are several different types and not all are subject to the same restrictions. Untangling the various definitions and subsets of private foundations is beyond the scope of this book.