Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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beneficiary(ies) and one payable to the individual beneficiary(ies), rather than putting both types of beneficiaries on the same account and risking loss of the life-expectancy-of-the-beneficiary payout method through the beneficiaries’ failure to meet the deadlines for establishing separate accounts (or paying out the charities’ share). That way there is no pressure on the beneficiaries to get something accomplished by a particular deadline. See the “Rita” Example. On the other hand, if establishing separate IRAs prior to death would be disproportionately burdensome compared to the benefits gained thereby, it makes sense to rely on the exceptions. See the “Matt” and “Lonnie” Examples. Rita Example: Rita wants to leave half of her $2 million IRA to her favorite charity and the other half (along with the rest of her estate) to her son James. James, now age 44, is counting on using the life expectancy payout method for his share of the IRA. He would have ample assets from the rest of the estate to pay all estate taxes and provide for other immediate needs, and sees the required minimum distributions from his half of the inherited IRA as eventually being a major source of retirement income for him. Rather than leave it up to James and the charity to make sure, after her death, that the IRA is divided into separate accounts by a certain deadline, or that the charity’s share is entirely paid out to it by an even earlier deadline, Rita divides her IRA into two separate IRAs during her life, one payable to James and one to the charity. She will have to keep an eye on the two accounts during her life, transferring assets from one to the other (or taking distributions from them in certain proportions) to keep them approximately equal in value. Her durable power of attorney directs her attorney to make reasonable efforts to keep the accounts equal in value if she becomes disabled. Matt Example: Matt has a $1,000,000 IRA. On his death, he wants half of it to go to his favorite charity, and the other half to go to his wife, if living, otherwise his sister. Matt is 75, his wife is 72, and his sister is 76. He understands that, by naming a charitable and an individual beneficiary on the same account, he is taking a risk that, after his death, the individual beneficiary would not qualify for the life-expectancy-of-the-beneficiary payout method unless the charity’s share is paid out to it, or established as a separate account, by certain deadlines. However, he is not concerned about this risk. His wife can roll over her share of the IRA; even if she and the charity miss the 9/30 and 12/31 deadlines, his wife would still be entitled to roll over her share to her own IRA (see ¶ 3.2 ) and get a fresh start (after taking any required distributions from the inherited IRA). If his wife does not survive him, so the individual beneficiary is his sister (who cannot roll over her share of the IRA benefits to her own IRA), he still doesn’t care whether her interest qualifies for the life- expectancy-of-the-beneficiary payout method. Matt is past his RBD, so the no-DB ADP for the IRA is Matt’s remaining life expectancy. Since Matt is younger than his sister, Matt’s life expectancy gives the sister a longer payout period than her own life expectancy would provide (see ¶ 1.5.04 (C)). Thus, there is no tax reason to split up the IRA into two IRAs (which would make life more complicated for Matt). Lonnie Example: Lonnie is leaving his $300,000 IRA in equal shares to his favorite charity, his son, and his daughter. Though he realizes the son and daughter will not be able to use the life- expectancy-of-the-beneficiary payout method if they fail to establish separate accounts (or pay out the charity’s share) within a certain time after his death, he feels they will have ample time to take care of this, and they are well aware of the requirement, as are the charity and Lonnie’s professional advisors. Furthermore, in the unlikely event the job does not get done on time, the loss of the life