Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

C. Accomplish other estate planning goals. Judicious use of charitable giving with retirement benefits can help the client accomplish other estate planning goals at the same time as he fulfills his charitable intentions. See ¶ 7.5.06 .

D. Drawbacks, limitations. Leaving taxable retirement plan benefits to charity is not a “perfect” estate planning idea:

 For one thing, it is not always true that an individual beneficiary will have more money at the end of the line if he inherits after-tax assets rather than the same nominal amount of retirement plan assets. A young individual who inherits a retirement plan and makes maximum use of the life-expectancy-of-the-beneficiary payout method to “stretch” the distributions over his life expectancy may end up with more dollars than if he had inherited the same amount of after-tax assets, due to the power of income tax deferral. See ¶ 1.1.03 .  The minimum distribution rules make this planning idea self-limiting. If a participant who has named a charity as beneficiary of his retirement plan lives long enough, the minimum distribution rules (see Chapter 1 ) will have forced out most of the plan’s value, and there will be little left for the charitable beneficiary. A retirement plan’s value tends to start shrinking significantly due to required distributions in the participant’s mid-90s. A long-lived charitably inclined participant should consider giving his RMDs to charity each year (see ¶ 7.7.02 ), and/or revising his estate plan to leave other assets to the charity to make up for the diminished retirement plan. If the client names one of his creditor as beneficiary of his retirement benefits, so that the benefits will be used to satisfy the client’s debt to that creditor, paying the benefits to the creditor would generate taxable income to the client’s estate . Although generally retirement benefits are taxed to the person who receives them ( § 402(a) ; see ¶ 2.1.03 ), the IRS would say that the estate “received” the IRD, because the estate’s debt was canceled when the benefits passed to the creditor. A charitable pledge that remains unfulfilled at death may, depending on applicable state law, constitute a debt enforceable against the estate. See, e.g. , Robinson v. Nutt , 185 Mass. 345, 70 N.E. 198 (1904) (unpaid written charitable subscription enforced as a debt against the estate due to charity’s reliance), and King v. Trustees of Boston University , 420 Mass. 52, 647 N.E. 2d 1196 (1995). However, a charitable pledge is not considered a debt for federal income tax purposes. Rev. Rul. 64-240, 1964-2 CB 172. Therefore, leaving retirement benefits to a charity in fulfilment of the decedent’s lifetime charitable pledge will not cause the estate to realize income when the charity collects the benefits, regardless of whether the pledge was enforceable as a debt against the participant’s estate. Charitable pledges (and other debts)

7.2 Seven “Hows”: Ways to Leave Benefits to Charity

Here are the seven ways retirement benefits can pass, upon the participant’s death, to a charitable beneficiary.

Name charity as sole plan beneficiary