Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

361

The method of leaving retirement plan benefits to charity that involves the fewest difficulties is simply to name the charity directly as the beneficiary of 100 percent of the death benefit payable under the particular retirement plan, as in the following example:

“I name as my beneficiary, to receive 100% of the benefits payable under the above-named retirement plan on account of my death, the ABC Community Foundation.”

Because the benefits are paid directly to the charity under the beneficiary designation form, income tax on the benefits is easily avoided. § 691(a) causes the benefits to be included directly in the income of the charitable recipient as named beneficiary, and the charity’s income tax exemption ( § 501(c) ) makes the distribution nontaxable. The estate tax charitable deduction ( § 2055(a) ) is available for the full value of the charity’s interest. This format works equally well for gifts to multiple charitable beneficiaries: If all beneficiaries of the plan are charities, the problems discussed in ¶ 7.2.02 – ¶ 7.2.06 do not arise. But no approach is problem-free. Based on anecdotal evidence, there can be problems with IRA providers and plan administrators when the participant seeks to name a charity as beneficiary. For example, the administrator may require documentation (such as articles of incorporation, corporate resolutions, etc.) before allowing the charity to collect the benefits it is entitled to. A small charity lacking staff may need professional help. A charity can be named as one of several beneficiaries receiving fractional shares of the retirement plan, with other fractional shares passing to noncharitable beneficiaries, as in “I name as beneficiary of my IRA My Favorite Charity and my son Junior in equal shares.” A. The problem: The IRS’s multi-beneficiary rule. The problem with this approach is that it risks losing the option of a “life expectancy payout” for the noncharitable beneficiary(ies). Under the “minimum distribution rules” a Designated Beneficiary can withdraw inherited retirement benefits in annual instalments over his life expectancy, thus achieving significant income tax deferral. See ¶ 1.1.03 . However, this favorable life expectancy or “stretch” payout option is available only to individual beneficiaries (and qualifying “see-through trusts”); a charity, as a nonindividual, cannot be a Designated Beneficiary. See ¶ 1.7.03 . If there are multiple beneficiaries, the regulations’ general rule is that all of them must be individuals or none of them can use the life expectancy payout method. Reg. § 1.401(a)(9)-4 , A- 3. Thus, if Junior and the charity are both named as beneficiary, the IRS’s “opening bid” is that Junior cannot use the stretch payout method. There are two exceptions to this harsh rule. Because of these exceptions, it is still feasible to name both charities and humans as beneficiaries of the same account (though it may still not be desirable ; see “D”). B. First exception: separate accounts. If there are multiple beneficiaries, but the respective beneficiaries’ interests in the retirement plan constitute “separate accounts,” each separate account is treated as a separate retirement plan for purposes of the minimum distribution rules. Thus, the Applicable Distribution Period ( ¶ 1.2.03 ) for each individual beneficiary will be his life expectancy, and he can use the life expectancy payout method for his Leave benefits to charity, others, in fractional shares