Charitable Tax Planning For Retirement Assets

Charitable Tax Planning For Retirement Assets

Article posted in Retirement Plans on 31 March 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

Qualified retirement plans represent one of the most significant, yet underutilized category of potential gift planning asset. In this edition of Gift Planner's Digest, Los Angeles attorney Jane Peebles tackles the complex rules that accompany testamentary charitable transfers.

by Jane Peebles, Esq.

In recent years, estate planning attorneys and other tax advisors have found that qualified retirement plans and individual retirement accounts (IRAs) represent a sub-stantial portion of their clients' assets. Since retirement assets passing to individuals other than a spouse are heavily taxed at death, charitable gifts of retirement plan and IRA proceeds have become a popular tax planning strategy. Such gifts can offer valuable tax benefits. However, the rules for structuring these gifts are highly complex, so the donor advisor must structure the gift with great care to be sure the plan does not result in inadvertent undesirable tax consequences for the donor's estate or family.

Terminology

For convenience, the author uses the term "retirement plan" to refer to any qualified plan under IRC Section 401(a) (such as a pension, profit sharing, 401(k), or Keogh plan), traditional IRA under IRC Section 408, or tax sheltered annuity under IRC Section 403(b). The rules discussed below do not apply to the new Roth IRA. Where rules applicable to IRAs differ from those applicable to qualified retirement plans, this difference is expressly mentioned.

The following abbreviations are used in this article:

DB: Designated beneficiary as defined in IRC Section 401(a)(9)(E).

IRA: A traditional individual retirement account under IRC Section 408.

IRC: The Internal Revenue Code of 1986, as amended.

IRD: Income in respect of a decedent under IRC Section 691.

MRD: Minimum required distribution under IRC Section 401(a)(9).

P: The participant who has the retirement benefits (the "employee" as to a qualified plan or the "individual for whom the account is established" as to an IRA).

RBD: Required beginning date under IRC Section 401(a)(9)(C).

Taxation of IRD Passing to Individuals

IRD is income generated during life but not realized until after death. IRD is includable in his or her estate and subject to estate tax if, and to the extent, the decedent has a taxable estate. Moreover, items of IRD includable in a decedent's estate do not receive a stepped-up basis for income tax purposes. [IRC Section 1014] Instead, items of IRD comprise taxable income of the beneficiary who receives them and retain the same character in the beneficiary's hands that they would have had in the decedent's hands. With the exception of any after tax contributions made by the decedent, death benefits under a retirement plan constitute IRD, and so are subject to income tax when received by the beneficiary, at the beneficiary's personal income tax rates. If retirement plan pro-ceeds are paid to an individual, the individual pays the income tax: if paid to the decedent's estate, the estate generally pays the income tax. Thus, retirement plan proceeds are often subject to both estate tax and income tax, with the estate responsible for paying the estate tax and the beneficiaries respons-ible for paying the income tax.

The beneficiary of retirement plan proceeds may claim an income tax deduction for that portion of the federal estate tax that was paid on the retirement plan proceeds. The amount of the deduction is determined by computing the federal estate tax with the IRD consis-ting of retirement plan proceeds included and then recomputing the tax with that IRD excluded. The difference between these two amounts is the amount of the income tax deduction. The deduction is itemized as a miscellaneous deduction, but is not subject to the 2% floor on miscellaneous deductions. [Rev. Rul. 92-47, 1992-1 C.B. 198] Readers should note that the income tax deduction for the federal estate tax paid on the proceeds is taken by the beneficiary who received the proceeds, regardless of who paid the federal estate tax.

This article does not factor in the impact of state estate or inheritance taxes on IRD passing to individual beneficiaries, since the rules governing these vary from state to state. In some states, such as California, there is no state income tax deduction allowed to the beneficiary for state estate taxes imposed on items of IRD. In such cases, the erosion of IRD by double taxation is more severe than as illustrated here.

The following example illustrates the effect of federal estate and income taxes on a retirement plan distribution to an individual beneficiary other than a surviving spouse, such as a child, following the death of P in 1999.

EXAMPLE 1: Taxation of IRD

Retirement plan proceeds $2,000,000
Non-IRD estate assets 8,000,000
Gross estate $10,000,000
Less: federal estate tax (after $650,000 unified credit exemption equivalent) (3,861,900)
Net to child before income tax $6,138,100
Federal estate tax on $10 million (with IRD) $3,861,900
Less: federal estate tax on $8 million (without IRD) (3,056,300)
Federal estate tax attributable to $2 million IRD $805,600
IRD includable in child's gross income ($2 million less $805,600) $1,194,400
Income tax on IRD paid by child (39.6%) $472,982
Combined estate and income taxes ($3,861,900 + $472,982) $4,334,882
Net to child $5,665,118
Percent of estate lost to taxes 43.3%


IRD Passing to Charity

Charitable gifts of retirement plan proceeds have become popular because IRD left to charity can escape both estate and income taxation. If the gift is properly structured, the decedent's estate will be entitled to an estate tax charitable deduction under IRC Section 2055(a) for the amount of IRD passing to charity. Moreover, if a tax-exempt charity is the beneficiary of the retirement plan, the charity pays no income tax on the retirement plan proceeds it receives.

As a general rule, if the client's estate is large enough to provide both for indivi-dual heirs and for charitable gifts, the best strategy is to leave individual beneficiaries the non-IRD property, which receives a stepped-up basis at death so is not double taxed, and leave the retirement plan proceeds to charity.

EXAMPLE 2: Assume that Mary is a widow with one child, Tom, who is in the 39.6% federal income tax bracket. Her estate of $1.3 million consists of a $650,000 rollover IRA, her house valued at $400,000 and $250,000 of marketable securities. She has her full unified credit available. Mary wishes to benefit both her son and her alma mater.

Table 1: Mary leaves 50% of each asset to Tom and 50% to her favorite charity and dies in 1999.

Asset Charity Tom
50% IRA $325,000 $325,000
50% house $200,000 $200,000
50% securities $125,000 $125,000
Gross bequest $625,000 $650,000
Less income tax on IRA 0 (128,700)
Net bequest $650,000 $521,300


Table 2: Mary leaves the entire IRA to charity and the house and securities to Tom and dies in 1999. The income tax on the IRA is avoided, so Tom receives $128,700 more.

Asset Charity Tom
IRA $650,000  
House   $400,000
Securities _________ $250,000
Gross bequest $650,000 $650,000
Less income tax on IRA 0 0
Net bequest $650,000 $650,000


These examples and tax concepts are simplified to illustrate the potential tax savings offered by a charitable gift of retirement plan proceeds. In the real world, this type of planning is full of traps for the unwary. To avoid these traps, the donor advisor must understand the basic rules that apply to retirement plan distributions.

Distribution Requirements and Designated Beneficiaries

The rules governing how fast a participant ("P") must take distributions from his or her retirement plan after the required beginning distribution ("RBD"), and how and when distributions from the retirement plan must be made after P's death depend upon two primary factors: 1) whether P dies before or after the RBD; and 2) who the plan beneficiaries are.

The Required Beginning Date

Under current tax laws, the RBD for IRAs is always April 1st of the calendar year after the calendar year in which P attains age 70½. For qualified retirement plans, P can postpone distributions until his/her actual retirement, even if P retires after what would otherwise be the RBD, unless P owns more than 5% of the company that sponsors the plan. For purposes of this article, the author assumes a RBD of April 1st of the year after the year in which P attains age 70½.

Death Before the RBD. If P dies before the RBD, the general rule is that all plan proceeds must be distributed by December 31st of the calendar year that contains the fifth anniversary of P's date of death. [Prop. Reg. 1.401(a)(9)-1 Q&A C-2] As an exception to this so-called "five-year rule," the proceeds may be paid out over the life expectancy of P's DB if cer-tain requirements are met [IRC Section 401(a)(9)(B)(iii)], or if P's spouse is the benefici-ary. [IRC Section 401(a)(9)(B)(iv)]

If P dies before the RBD and P's spouse is the beneficiary, the proceeds may be paid in annual installments over the spouse's life expectancy, with the first payment to be made by the later of December 31st of the calendar year after the year of P's death, or December 31st of the year in which P would have attained age 70½ had he or she lived.

If P dies before the RBD, and the designated beneficiary is anyone other than P's spouse, the proceeds may be paid in annual installments over the life or life expectancy of P's designated beneficiary ("DB"), with the first payment to be made no later than December 31st of the year following P's death.

Designated Beneficiaries: A DB must be: 1) an individual; 2) a group of individuals; or 3) the individual beneficiary or beneficiaries of a trust if certain special rules are followed. If the plan beneficiary is a trust, and the special requirements to allow individual trust beneficiaries to be treated as the DB's have not been met, or is P's estate (either by beneficiary designation or under the plan's governing document in the absence of a beneficiary designation), then P is treated as having no DB; since P has no DB, the five-year rule applies.

Death After RBD: If P survives the RBD, whether P has a DB as of the RBD also affects how fast P must take plan distributions. If P is married and P's spouse is the DB, P may take distributions based on the joint lives of P and P's spouse, which minimizes the amount that must be paid to P during P's lifetime. P's spouse may take a lump sum distribution after P's death, place it in a rollover IRA, name his or her own beneficiaries and take distri-butions based his/her life expectancy and that of his or her DB.

If P names multiple individuals as the DBs of a single plan, those DBs will be required to take distributions based on the life expectancy of the oldest DB, which will be the shortest life expectancy.

If P has no DB as of the RBD, P must take distributions over P's own life expectancy. If P does not recalculate his or her life expectancy, there may be nothing left in the plan at P's death.

These rules are important because a charity cannot be a DB. The ramifications of this may cause unintended results.

In general, if P survives the RBD, then after P's death, distributions must contin-ue to be made annually over the balance of whichever applies of P's sole life expec-tancy, or the joint life expectancy of P and the DB that was used to set the minimum distributions during P's life. If P chooses not to recalculate his/her life expectancy, then life expectancy will disappear at P's death, and all plan pro-ceeds will have to be distributed within one year after death. If your goal is maximum deferral of income tax on the proceeds, and the plan beneficiary is not a charity, it is critical that P has a DB as of P's RBD.

Outright Testamentary Charitable Gifts of Plan Proceeds

Donors are often told that an outright testamentary gift of retirement plan proceeds to charity is easy to implement since the charity need only be named as the plan bene-ficiary on a beneficiary designation form. This approach is touted as an inexpensive strategy too, since no special documents are required so no legal fees are involved.

Charity As Sole Plan Beneficiary: Even when a charity or charities will receive 100% of the plan proceeds, simply naming the charity as the recipient on the beneficiary designation form often will not be the best approach. It is true that simply naming the charity as the primary beneficiary of 100% of the plan will avoid estate and income taxation of the proceeds; however, this simple approach may also decrease the amount passing to charity. If P names a charity as the plan beneficiary prior to the RBD, P will be deemed to have no DB. As a result, the required distributions P must take during his/her life will be based on his or her sole life expectancy. This forces P to take larger annual payments than P may need or want, and will leave less to pass to charity at P's death.

If P does not need the larger plan distributions, a better plan would be to name a cooperative individual as the primary beneficiary and the charity as the contingent beneficiary. P would then take less in distributions during life, since the minimum distributions would be based on the joint life expectancy of P and P's individual DB. After P's death, the individual beneficiary could disclaim the proceeds, which would then pass to charity. If the individual beneficiary died before P, but after the RBD, the same result would be obtained, since the speed with which P must take distributions is based on the DB as of P's RBD. P can change his DB after the RBD but cannot thus extend the life expectancy with respect to which required distributions are calculated (though a post-RBD change of beneficiary will shorten that period if the new beneficiary is older than the DB as of the RBD or has no life expectancy, as would be the case if a charity were the beneficiary).

Multiple Plan Beneficiaries with Charity as a Beneficiary: How to Make the Beneficiary Designation. If P designates both a charity and one or more individuals as plan beneficiaries, P may be treated as having no DB. As a result, if P dies before the RBD, the entire plan balance may have to be paid out by December 31st of the calendar year in which occurs the fifth anniversary of P's death. If P survives the RBD, distribution may have to be made by December 31st of the year after the year of P's death.

If possible, avoid mixing charities and individuals as the beneficiaries of a single plan account, if the client wants the individual beneficiaries to be able to take payouts under the life expectancy method, rather than in a lump sum. The Proposed Treasury Regulations take the position that, in order to avoid the five-year payout rule, if P dies before the RBD, all DBs must be individuals. The Proposed Regulations provide that if any benefit at all (even 1%) is to be paid to a beneficiary that is not an individual, P will be deemed not to have a DB and the five-year rule will apply. [Prop. Reg. 1.401(a)(9)-1 Q&A E-5]

Example 3: John, a widower with one child, has a $1 million IRA. Before his RBD, he completes a beneficiary designation specifying that $1,000 of the IRA proceeds is to pass to his church and the balance to his child. If John dies before his RBD, all of the proceeds must be paid out within five years. [Proposed Treasury Regulation 1.401(a)(9)-1 Q & A E-5]

This result can be avoided by dividing the IRA into two separate IRAs, with one payable to P's charitable beneficiary and one payable to P's child. The distribution to charity will be in a lump sum, but since the charity is tax exempt, there will be no accelerated income tax. The child will be able to take distributions based on life expectancy, and thus defer the income tax.

Proposed Treasury Regulation 1.401(a)(9)-1 Q&A H-2 says that if there are multiple beneficiaries, each may use his or her own life expectancy to calculate the payout of his/her share of the proceeds, if the retirement plan is divided into separate accounts that are separately accounted for. For example, if P is the father of three children who are not close in age, so that distribution over the life expectancy of the oldest child is undesirable, P can divide his IRA into three IRAs, with one payable to each child. Each child will then be able to take distributions over his or her own life expectancy.

IRC Section 401(a)(9)(B)(iii) is less draconian than the Proposed Regulations. The more liberal language of IRC Section 401(a)(9)(B)(iii), allows payment of a beneficiary's "portion" of the plan over his/her life expectancy. Under this language, as long as the charity's share is expressed as a fraction or percentage, rather than a specific dollar amount, income tax deferral by the individual beneficiaries may be available even where the division of the plan does not occur until P's death. [Life and Death Planning for Retirement Benefits, Choate, Natalie B., Ataxplan Publications, Boston, MA, 2nd Edition, 1993, at pages 18 et seq.] However, there is no assurance that this approach satisfies the "separate account" rule, so division of the plan or IRA is the safest route in this situation. The next safest approach is to name a charity to receive a fraction or percentage of the retirement plan proceeds, with the residue to pass to individuals, or vice versa. This latter approach is more commonly used since clients resist the inconvenience of dividing the plan into separate shares during P's life.

Payment to Estate or Living Trust with Charity as Beneficiary

If the right to receive plan proceeds is specifically bequeathed to charity under a Will or living trust, the result for income taxes should be the same as if the charity were designated as the plan beneficiary. IRC Section 691 will impose income tax on the IRD, which is payable by the recipient beneficiary. If the beneficiary is a tax-exempt charity, it will receive the proceeds tax-free. In order to obtain this result, the plan proceeds must be specifically bequeathed to the charity, and the estate or living trust must assign to the charity the right to receive the proceeds.

If the right to receive the plan proceeds is bequeathed to charity, but the pro-ceeds are actually paid to the estate before the estate can distribute to charity the right to receive the IRD, the estate will be subject to income tax on the IRD. However, the estate is not permitted to claim a deduction under IRC Section 663(a)(2) for a distribution to a charitable beneficiary. Therefore, the estate will have no offsetting income tax deduction unless it can claim an IRC Section 642 deduction for its distribution to charity. IRC Section 642 allows the estate or living trust an income tax deduction for charitable gifts that are required by the governing document to be paid out of income. Since the IRD is income for income tax purposes (though it is principal for fiduciary accounting purposes), a specific bequest of the retirement benefits to charity meets this requirement.

If the Will or living trust includes a pecuniary charitable gift, and the executor or trustee decides to (but is not required to) satisfy that gift with plan proceeds payable to the estate or trust, the estate or trust will pay income tax on the proceeds and will have no offsetting charitable deduction.

A deduction is also allowed to an estate (but not generally to a trust) for amounts "permanently set aside" for charity pursuant to the terms of the governing instrument. [IRC Section 642(c)(2)] This can eliminate income tax on retirement plan proceeds paid to an estate that pass to a charitable residuary beneficiary even if those benefits are not distributed to the charity in the year the estate receives them. It appears that if a living trust makes the new IRC Section 645 election to be treated as an estate for income tax purposes, it may be able to claim the IRC Section 642(c)(2) deduction.

Under Proposed Treasury Regulations, it is now easier to name a living trust to receive plan proceeds and have the trust beneficiaries treated as designated benefici-aries. [Prop. Reg. 1.401(a)(9)-1 Q&A D-5 and D-6] This procedure need not be followed, however, if a charitable remainder trust is designated as the beneficiary. Since the charitable remainder trust is a tax-exempt entity, it can receive a lump-sum distribution of plan proceeds without paying income tax on the proceeds in the year of receipt.

Pledges

Retirement plan proceeds should not pass to charity in satisfaction of an enforceable pledge made by P during life. Whether a charitable pledge unfulfilled at death is a debt enforceable against the estate of the decedent who made the pledge depends upon state law. Generally, a written pledge is an enforceable debt if there was consideration from, or reliance by, the charity. An oral pledge is generally not enforce-able.

If plan proceeds, which are income to the estate for income tax purposes, are assigned by the estate in satisfaction of a charitable pledge, the estate must realize and pay tax on that income. [John T. Harrington Estate, 2 TCM 540, Dec. 13, 1943, 405(M)] Although IRD passing to charity would normally be income of the charity, the estate is deemed to have received the IRD from the decedent because the payment of the IRD to the charity canceled the estate's debt to the charity. [Treas. Reg. Section 1.691(a)-2(a)(1)]

Estate Tax Charitable Deduction

A full IRC Section 2055(a) estate tax charitable deduction will be available to P's estate for the amount of plan proceeds passing to the charity other than in satisfaction of a pledge. The beneficiary may be a public charity, private foundation, or charitable remainder trust, with only the remainder interest deductible as to the latter.

Donor Advised Fund as Beneficiary

Retirement plans may also be made payable to a donor advised fund at a com-munity foundation. P could then designate his or her children as the donor advisors, to make recommendations regarding charitable grants from the fund. These recommendations must be only advisory, and the community foundation must have power to veto them. How-ever, establishing a donor advised fund is a quick, easy way to involve the children in philanthropy and money management.

Some clients start a donor advised fund with "seed money" during life so that they and their children may share this philanthropic experience. Retirement plan pro-ceeds then augment the fund on the death of the second parent to die. The donor receives an income tax deduction for lifetime additions to the fund, which is a public charity for purposes of percentage limitations on income tax charitable deductions. The estate of the second to die of P and P's spouse receives a 100% estate tax deduction for plan proceeds passing to the donor advised fun on the surviving spouse's death.

Private Foundation as Beneficiary

P may wish to name his or her family foundation as the plan beneficiary. As with donor advised funds, many private foundations are started small during P's lifetime, with the retirement plan proceeds added on the death of the first or second spouse to die. Additions at death qualify for the unlimited estate tax charitable deduction. Life-time contributions are subject to the private foundation percentage limitations on the income tax charitable deduction.

If the funding is to occur by disclaimer, care must be taken to insulate the dis-claimant from grantmaking decisions. If a child is the DB of the plan and disclaims all or a portion of the proceeds, which then pass to the family foundation, the child will render the disclaimer invalid if the child participates in grantmaking decisions with respect to those funds as a member of the board of the private foundation. To avoid this result, the plan proceeds could be placed into a segregated subaccount as to which the disclaimant has no vote. The reason for funding by disclaimer, as discussed above, is that P must have an individual DB as of the RBD in order to take plan distributions based on a longer period than P's own actuarial life expectancy.

The foundation does not recognize taxable income when it receives the pro-ceeds. [PLR 9341008 (July 14, 1993)] Moreover, the plan proceeds are not considered net investment income of the foundation so are not subject to the 2% excise tax on investment income under IRC Section 4940. [PLR 9838028 (June 21, 1998)] The pro-ceeds are includible in P's gross estate under IRC Section 2039(a), but the estate gets an estate tax charitable deduction under IRC Section 2055(a) for the full amount of the proceeds passing to the foundation.

Testamentary Gift to a Charitable Remainder Trust

If a charitable remainder trust (CRT) is the beneficiary of retirement plan pro-ceeds, the proceeds will be paid to the CRT in a lump sum after P's death. However, since the CRT is a tax-exempt trust, there will be no immediate income tax on the proceeds. The IRD ordinary income will later pass out to the individual beneficiary or beneficiaries as the unitrust amount or annuity is paid to them.

If P survives the RBD and names a DB after the RBD, and if P has no spouse who could roll the proceeds over, the DB will be forced to take full distribution within one year after P's death, thus accelerating all of the income tax on the IRD. In this circum-stance, naming a CRT as the plan beneficiary after P's RBD will defer the income tax in a manner similar to the deferral obtained when payout occurs over an individual beneficiary's life expec-tancy.

A testamentary CRT for the benefit of a spouse may be desirable, particularly in a second marriage situation. The spouse's interest in the CRT will qualify for the estate tax marital deduction under IRC Section 2056(b)(8). The remainder qualifies for the estate tax charitable deduction under IRC Section 2055(a). [PLR 9253038 (October 5, 1993)]

If a testamentary CRT is established to benefit children, P's estate will pay estate tax on the actuarial value of the children's interest in the CRT as of P's death, but the estate will get a charitable deduction for the remainder. The distribution of the plan proceeds to the CRT constitutes IRD and is includible in the CRT's income in the year received but is not taxable unless the CRT also has unrelated business taxable income. [Rev. Rul. 69-297, 1969-1 C.B. 131; Rev. Rul. 75-125, 1975-1 C.B. 254]

Distributions from a CRT to the individual beneficiaries are characterized under a four-tier rule. First, the distributions comprise ordinary income to the extent the CRT has ordinary income in the current year or undistributed from prior years; second, as capital gains to the extent of the CRT's gains in the current year or undistributed from prior years (first short-term and ten long-term); third, tax-free income to the extent of the CRT's tax-free income in the current year or undistributed from prior years; and fourth, as return on principal. [IRC Section 664(d)] The IRS takes the position that, when IRD passes to a CRT, it is ordinary income, and all distributions to the individual beneficiary are treated as ordinary income until the full amount of the IRD has been distributed from the CRT. [PLR 9634019 (May 24, 1996)] Thus, although the contribution of proceeds to the CRT is considered principal under state law, the taxable nature of the IRD causes its classification as first-tier ordinary income rather than fourth-tier principal for federal tax purposes.

The IRC Section 691(c) income tax deduction for estate tax paid on IRD may never be usable where retirement plan proceeds pass to a CRT: The donor's estate tax on the actuarial value of a non-spouse individual CRT beneficiary must not be paid from the CRT; it is typically paid by the donor's estate or living trust. The IRC Section 691(c) deduction is allowed to the recipient of the IRD. The CRT cannot use the deduction and has no apparent way to pass it out to the individual beneficiary, so it appears that the IRC Section 691(c) deduction may be lost unless the individual beneficiaries can prorate it over the years as they receive their CRT distributions.

It is best to establish the CRT during P's life and name it as the direct beneficiary of the plan proceeds. If the proceeds are paid to P's estate or living trust, and the executor or trustee is required to use the proceeds to fund a CRT established under the Will or living trust, the estate gets an estate tax charitable deduction for the value of the charitable remainder, but does not get the IRC Section 642(c) deduction. It is therefore best to keep the IRD off of the estate's income tax return altogether, or the estate will have the income with no offsetting income tax deduction.

Pooled Income Fund as Beneficiary

A pooled income fund is not tax exempt. It usually avoids income taxation by distributing all of its net investment income to its donors. A pooled income fund can retain long-term capital gains without paying income tax on them by claiming an income tax charitable deduction for the long-term capital gains allocated to principal for the benefit of charitable remaindermen. There is no such deduction under IRC Section 642(c)(3) for IRD. IRD paid to the pooled income fund is principal under state law, but income for federal income tax purposes. The result is a "trapping distribution," and the pooled income fund must pay income tax on the IRD. For this reason, plan proceeds should not be made payable to a pooled income fund.

Lifetime Gifts of IRD to Charity

Few clients will choose to take lifetime plan distributions so the proceeds can then be contributed to charity. The donor's deduction would almost always be less than the amount of the contribution, due to the annual charitable deduction percentage limita-tions and the 3% phase out of itemized deductions under IRC Section 68.

Legislation has been introduced that would permit an IRA owner to assign IRA funds to charity during his/her life without being deemed to have taken a taxable distribution and then to have contributed the net to charity. However, such legislation has not yet passed, and there is currently no way for the donor to avoid the income tax in this circumstance.

However, if your client is forced to take plan distributions more rapidly than needed, such as where a charity or CRT is the named beneficiary so the plan payout is calculated only with respect to P's own life expectancy, P could donate to charity the excess that is not needed, and could claim a charitable deduction to offset the income tax liability, at least partially. In this case, P would want to recalculate his or her life expectancy to ensure that there would be some benefit left for charity at P's death.

Conclusion

Charitable gifts of retirement plan assets can offer great tax benefits, while also meeting a client's philanthropic goals. Care must be taken, though, in designing beneficiary designations and counseling the client about the options available until the RBD. This article is not intended to be an exhaustive discussion of all pertinent issues and planning strategies but, rather, to be an overview of basic rules and some of the more common and important planning considerations.

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