Estate Planning and IRA and Retirement Plan Distributions
Many people have accumulated substantial assets in their income tax-deferred retirement plans. Such plans can include profit sharing or defined contribution plans (funded by employer contributions allocated to tax-deductible individual accounts for participants); 401(k) plans (individual account plans funded by pre-tax employee contributions and deductible employer contributions); defined benefit plans (which generally provide the employee with an employer-funded benefit in the form of a fixed annual payment); 403(b) plans (which give similar opportunities to employees of governmental and charitable entities); and individual retirement accounts (i.e., traditional IRAs). Note that Roth IRAs are not a consideration in this regard as they are not subject to tax upon distribution to the Roth IRA owner or his or her beneficiary. Unfortunately, such accumulated wealth may be more illusory than real. This is especially true in the case of the death of the participant when retirement plan assets are potentially subject to a combination of taxes which, when taken together, may be described as confiscatory.
Income Tax and Estate Tax
Careful income tax and estate tax planning can minimize or at least defer the impact of such taxes upon the death of the plan participant. For many, these retirement plan assets may best be used to accomplish charitable goals which, in conjunction with planning for family members, can minimize the tax impact at the cost of dedicating all or a substantial portion of the retirement assets to charity. To the extent that an individual is charitably inclined in the first instance, using retirement plan assets to further such charitable purposes to save taxes has an obvious appeal. Even persons who would not, in the absence of the otherwise applicable adverse tax consequences, be charitably inclined, may find that dedicating retirement plan assets to charitable purposes in appropriate circumstances is a desirable alternative to having such assets “lost” to taxation.
Retirement Account Distributions
Moreover, retirement account distributions, except for Roth IRAs or Roth 401(k) plans, are considered “income in respect of a decedent” and are thus income taxed after death to the recipient. Such income is includible in the gross income for the taxable year when received of (i) the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate, (ii) the person who, by reason of the death of the decedent, acquires the right to receive the item of income, or (iii) the person who acquires from the decedent the right to receive the item of income by bequest, devise or inheritance. A person who includes such income in gross income is allowed, for the taxable year in which such income is received, a deduction for the estate tax paid attributable to such income.
It is very simple and straightforward if the charity is named as the outright beneficiary of the account. Note that as to qualified retirement plans, not IRAs, in order to designate a beneficiary other than the decedent’s spouse, spousal consent is required. Care must be taken, however, if the retirement account is payable to the donor’s estate or a trust created by the donor either during the donor’s lifetime or under the donor’s Will if charities are intended as beneficiaries thereof.
THUS, IT IS ADVANTAGEOUS TO GIVE OR BEQUEATH AN IRA OR OTHER RETIREMENT ACCOUNT TO CALVARY OR OTHER CHARITABLE ORGANIZATIONS. TRANSFERS TO CHARITY ARE NOT SUBJECT TO EITHER ESTATE OR INHERITANCE TAXES OR FEDERAL AND STATE INCOME TAXES.”
In a recent ruling, an estate was required to pay income tax on IRA funds that the decedent had bequeathed to his revocable inter vivos trust, which had named three charities to receive a total of $100,000, with the remainder passing to the decedent’s children. The trustee requested the IRA custodian to divide the IRA into three shares, making each charity the owner and beneficiary of an IRA equal to the dollar amount specified in the trust. The IRS concluded that the trust must include the value of the IRA in its gross income but no charitable deduction was allowable because the trust did not direct or require that the charitable bequests be paid from the trust’s gross income. This matter would never have arisen if the donor had named the charities directly on the IRA beneficiary form. It would also have been advisable to use cash in the trust (if it had any) to satisfy the pecuniary bequests to the charities which would have prevented acceleration of income from the IRAs. (IRS Internal Legal Memorandum 200644020).
The Pension Protection Act of 2006
The Pension Protection Act of 2006 provided for certain tax-free distributions to charity for the years 2006 and 2007. Someone who is at least 70-1/2 can contribute up to $100,000 from an IRA to a “public” charity, such as Calvary Fund Inc. of Calvary Hospital, which must be an organization described in Internal Revenue Code Section 170(b)(1)(A). The institution holding the IRA must make the distribution directly to the charitable organization. Note that supporting organizations, private foundations and donor-advised funds do not qualify. The distribution to the charity counts towards the minimum distribution but will not be taxable; it also will not qualify for a charitable income tax deduction but such a deduction has limitations. The limitations are immaterial to the direct contributions since the dollars are not taxable, it is as if one is getting a 100% deduction.
In addition, the contribution will not count towards the annual cap on the charitable deduction for gifts of no more than 50% of adjusted gross income. Call 718-518-2080 for additional materials on how to use retirement assets for charitable giving and estate planning.
Categories
Archives
- October 2024
- August 2024
- July 2024
- May 2024
- April 2024
- March 2024
- February 2024
- December 2023
- November 2023
- October 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- January 2023
- December 2022
- October 2022
- August 2022
- July 2022
- June 2022
- April 2022
- March 2022
- February 2022
- January 2022
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- April 2012