Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

that Charity X has failed to withdraw from the account by September 30 of the year after the year of my death) to my issue surviving me by right of representation.” Thus, he has guaranteed that the life expectancy payout method will be available for his children, because (as of the Beneficiary Finalization Date) they are the only beneficiaries of the IRA (because the charity has either received or forfeited its share). Now Richard has one more concern: This conditional IRA gift to charity may not entitle his estate to an estate tax charitable deduction. To cover that gap, he puts the following bequest in his Will: “I bequeath to Charity X the sum of $10,000, reduced by any amounts paid to the said Charity from my IRA.” Thus, the estate tax deduction is assured, because the charity is guaranteed to receive the $10,000 either from the IRA or from the probate estate. This is a complicated way to deal with the problem, but every method has its drawbacks. Often, the amount a client wants to leave to charity is neither a fixed dollar amount nor a fractional share of the retirement plan, but rather is derived from a formula based on the size of the client’s estate and/or adjustments for other amounts passing to the charity. Corey Example: Corey wants to leave 10 percent of his estate to his church and the balance to his issue. His assets are a $2 million IRA, a home worth $1 million, and other investments worth $3 million. Thus, based on present values, he would expect the church to receive about $600,000. One way to accomplish that goal is to leave the charity 10 percent of the IRA and 10 percent of the rest of the estate. That approach exactly carries out Corey’s intent of leaving 10 percent of all his assets to the church. However, that is not the most tax-efficient way to fund the church’s share. As explained at ¶ 7.1.02 (B), without reducing the amount the church receives, Corey could leave more to his children by funding the church’s share entirely from the IRA. His lawyer drafts a beneficiary designation formula leaving the church a fractional share of the IRA equal to 10 percent of Corey’s total estate, and leaving the balance of the IRA (if any) to Corey’s issue. The first problem with a formula beneficiary designation is that the IRA provider may not accept it. The IRA provider normally does not have the information needed to apply the formula. For example, Corey’s IRA provider it has no way to determine what assets are in his estate; all it knows is what is in the IRA. Also, the IRA provider typically charges a nominal fee for providing custodial duties, and its services do not include calculating elaborate formula amounts. Both these problems can be overcome, with some IRA providers, by specifying that the participant’s executor or some other fiduciary will provide the formula amount to the IRA provider, and that the IRA provider has no responsibility for verifying that the fiduciary’s figures are correct. For example, one IRA provider requires any IRA holder who files a “customized beneficiary designation” to supply, along with the beneficiary designation, an authorization that allows the IRA provider to rely on representations by the participant’s executor. If using this approach, make sure that the related trust document or will specifies that this task is part of the duties the fiduciary undertakes by agreeing to be executor or trustee. Formula bequest in beneficiary designation

Leave benefits to charity through a trust