Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

389

Certain private foundations, although exempt from “regular” income taxes (except the tax on UBTI), are subject to a two percent excise tax on net investment income. § 4940 . The § 4940 tax “is a limited excise tax that applies only to the specific types of income listed in that section. Amounts from retirement accounts are deferred compensation income,” not part of “the gross investment income” of a foundation, and therefore are not subject to the tax, according to PLRs 9838028 and 2000-03055. These PLRs evidently supercede the earlier PLR 9633006, which ruled that a distribution from a Keogh plan to a foundation was subject to the two percent tax to the extent it represented investment income and gains accumulated inside the retirement plan, but not to the extent it represented contributions to the plan by the decedent or his employer—despite the IRS’s contrary even earlier PLR 9341008, holding that the tax does not apply to any property a foundation receives as a gift, including IRA death benefits. See Timothy W. Mulcahy, CPA (criticizing PLR 9633006), “Is a Bequest of a Retirement Account to a Private Foundation Subject to Excise Tax?,” 85 Journal of Taxation 2 (August 1996), p. 108. A donor-advised fund (DAF) is a “public” (501(c)(3)) charity that receives contributions from many individual donors, invests those contributions as separate accounts (one per donor), and distributes the account funds at a later time to “real” charities such as schools, museums, and aid organizations. The donor of the gift (or other individual appointed by the donor) “advises” the DAF which charities to distribute the funds to. The DAF is not obligated to follow the advisor’s suggestions but normally does so. Originally offered by community foundations, DAFs are now run also by mutual fund firms and (unfortunately) some questionable organizations as well. Some problems led Congress to impose more regulations and penalties on DAF abuses; see § 4966 and § 4977 . However, most use of DAFs is entirely benign and DAFs are very useful for donors, so hopefully they will continue to exist, and donors will avoid the abusive transactions. One legitimate use of the DAF is to involve family members (the donor’s children, typically) in philanthropy. By leaving assets to a DAF where his children are the advisors, the donor provides a philanthropic role for them. Because a DAF is an income tax-exempt 501(c)(3) charity, funding it with retirement plan death benefits is highly suitable. However, individuals leaving retirement plan death benefits to a DAF should take precautions to make sure the chosen DAF meets any applicable requirements. Gifts may have to be made conditional on the DAF’s meeting such requirements, in order to assure the desired tax-free and deductible nature of the contribution, with a contingent gift over to a more typical “public” charity if the chosen DAF does not meet the applicable requirements. Regarding disclaimers to a DAF, see ¶ 7.2.07 , #1. Suitable: Donor-advised fund

Suitable: Charitable remainder trust

A Charitable Remainder Trust (CRT), as that term is used here, means a charitable remainder trust that meets the requirements of § 664 and accordingly is income tax-exempt. § 664(c)(1) . The general idea of a CRT is that the trust pays out an annual income to one or more