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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.


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.