Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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to the individual beneficiary tax-free as part of the last tier. However, the tax-free principal of the CRT is not deemed distributed until after all net taxable income has been distributed. This point would never be reached in most CRTs funded with retirement benefits. Accordingly, under this interpretation, the § 691(c) deduction is essentially “wasted” when retirement benefits are left to a CRT. The IRS confirmed this interpretation in PLR 1999-01023. Some practitioners disagree with the result in this ruling and argue that the unitrust distributions to the human beneficiary from the CRT should retain their character as IRD and therefore carry out the IRD deduction to the human beneficiary along with the taxable income, citing Reg. § 1.691(c)-1(d) . For a client with any charitable inclination, naming a charitable remainder trust as beneficiary of retirement benefits can help solve estate planning problems in addition to satisfying the charitable intent. For example, it can be a good way to benefit charity while also benefitting an older individual (see “ A ”), multiple adults (“ B ”), the surviving spouse (“ C ”), or a disabled individual (“ D ”), or to dispose of a lump-sum-only plan (“ E ”). But caution is required: See ¶ 7.5.07 for drawbacks, risks, and other reasons NOT to leave benefits to a CRT. A. To benefit an older individual. Naming an older nonspouse individual outright as beneficiary of retirement benefits has the effect of dumping the benefits out of the plan and into the beneficiary’s gross income rapidly (over the beneficiary’s short life expectancy), so the income taxes get paid up front and the elderly person will have less money available in his later years. In contrast, if the benefits are left to a CRT for the life benefit of that person, he will enjoy a more-or-less steady income from the CRT that will last for his entire life (not run out at the end of some artificial life expectancy from an IRS table). In addition, the participant’s estate will get an estate tax charitable deduction which may free up some other funds that can be given to the same or other beneficiaries. A charitable gift annuity could also be used in this situation; ¶ 7.5.08 . The downside is that the individual beneficiary cannot take out more than the pre-set income stream from the CRT (or gift annuity) regardless of need. Hilda Example: Hilda, age 68, has a $3 million IRA. Her goal is to provide a life income to her sister Justine (age 71) and remainder to a charitable foundation. Leaving the benefits to a trust that provided life income to Justine and remainder to charity would require a rapid fully income-taxable distribution of the account after Hilda’s death. Such a trust would not qualify as a see-through trust (because of its nonindividual remainder beneficiary, the charity; see ¶ 6.2.09 ), so the IRA would have to be entirely distributed within five years after Hilda’s death ( ¶ 1.5.03 (E)). Even if the trust were a conduit trust (so it qualified as a see-through despite the charitable remainder beneficiary; ¶ 6.3.05 ), the benefits would have to be entirely distributed (and taxed) over Justine’s relatively short life expectancy (16 years). Assuming the income stream from a CRT would provide sufficient funds for Justine, Hilda should leave her IRA to a CRT for Justine’s life benefit. There would be no income tax on distribution of the benefits from the IRA to the CRT, and Hilda’s estate would get an estate tax deduction for the value of the charitable remainder. This solution assumes Hilda has other assets available to pay any applicable estate expenses and taxes (see ¶ 7.5.07 (A)). Solving planning problems with a CRT