Life and Death Planning for Retirement Benefits

Chapter 7: Charitable Giving

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Gerald’s alma mater, Cornell University. The actuarial value of the remainder interest, after the lives of two individuals aged 14 and 16, is only 3.523 percent. Because this is less than 10 percent, the trust “flunks” § 664(d) , and it is not a qualified charitable remainder trust. Gerald’s estate will not get any charitable deduction for estate tax purposes, and the trust will not be income tax- exempt, so it will have to pay income tax and estate tax on the entire $1 million IRA. Gerald could, instead, leave the benefits to a CRT that would last only for a fixed term of 20 years (thereby passing the 10 percent rule), to make the IRA-to-trust distribution income tax-free. C. Spousal consent may be required. Qualified plan benefits are subject to certain federal- law rights held by the spouse of the worker; accordingly, as to either all or part of a married client’s benefit under a qualified plan, it will not be possible to leave it to a CRT without the spouse’s consent. See ¶ 3.4 for explanation of these requirements. State law marital property rights may affect the participant’s ability to freely choose a beneficiary for an IRA. Connie Example: Connie, age 64, works at Acme Corp. where she has substantial funds in a qualified profit sharing plan. She and her husband are quite wealthy. Her husband, age 69, suffers from mental impairment. It would not be advisable to leave substantial funds to him outright. Connie would like to leave the 401(k) plan to a CRT that would pay a life income to her husband with remainder to a charity. She cannot do this without his consent. Obtaining his consent will require legal guardianship proceedings since he is mentally incompetent. Under a charitable gift annuity, a sum is left to a charity and the charity agrees to pay a fixed income to a human beneficiary for life. Leaving a retirement plan to a charity subject to the obligation to pay an annuity to the participant’s chosen human beneficiary could be a good way to provide an income for an older beneficiary. The participant’s estate gets an estate tax deduction for the value of the retirement benefits left to the charity minus the value of the annuity (determined using IRS tables). The benefits are paid to the charity free of income tax. See PLR 2002-30018. This approach has several advantages compared with the charitable remainder trust ( ¶ 7.5.06 (A)) or a life expectancy payout directly from the retirement plan: The human beneficiary would receive a fixed predictable income (which many beneficiaries prefer to the fluctuating income provided by a charitable remainder unitrust or a life expectancy payout from a retirement plan). There is no need to draft a CRT. The income is guaranteed to last for the beneficiary’s life, not run out at the end of her IRS-defined life expectancy. For an excellent explanation of charitable gift annuities, including what is known about funding them with retirement benefits, see “Charitable Gift Annuities” by William Finestone, 29 ACTEC Journal 37 (Vol. 29, No. 1), Summer 2003. Edith Example: Edith, age 64, wants to use her $300,000 IRA to provide a secure life income, after her death, to her brother Jeremy, who is four years younger than she, and to fulfill her charitable intentions. The amount is too small to justify creating a charitable remainder trust. A pooled income fund is not suitable (see ¶ 7.5.10 ). She leaves the IRA to Combined Jewish Philanthropies of Greater Boston subject to the requirement that it pay Jeremy a life income computed at the charitable gift annuity rate in effect on the date of her death. Suitable: Charitable gift annuity