Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

D. Fulfilment of pledge. A QCD is considered a payment “to” the participant for purposes of the prohibited transaction rules. Thus, it is not a prohibited transaction even if it is used to fulfill a pledge to the charity. IRS Notice 2007-7, A-44. E. Drawbacks, problems, and what will go wrong. QCDs are allowed only for direct transfers from the IRA to one of the permitted types of charitable recipients. If the money is first distributed to the individual, then donated to charity, it is not a QCD, and all the usual limits and drawbacks described at ¶ 7.7.01 will apply (there was an exception to this for certain charitable transfers in January 2013). While it might appear desirable for an over- age 70½ individual to use QCDs to fund all of his charitable contributions, there will be practical limits on this: Presumably, IRA providers will start charging “distribution fees” or setting minimum distribution amounts if they are asked to issue dozens of tiny QCDs. Finally, for an IRA owner who wants to give more to charity than just the amount of his/her RMD, the donor-owner should determine whether another form of charitable gift would be more advantageous for such additional gifting (such as gifts of appreciated stock from a taxable account).

7.7 Lifetime Gifts of Retirement Benefits

This ¶ 7.7 discusses lifetime (as opposed to at-death) charitable giving options for individuals who have money in IRAs and other retirement plans. Most of the considerations discussed here apply to both living participants and beneficiaries (with respect to inherited benefits they hold).

Lifetime gifts from distributions

A client who has more money in his retirement plan than he expects to need may wish to give some of it to charity. Generally, the only way he can do this is to first withdraw funds from the plan and then give the funds to the charity. For an exception to this general rule, see “Qualified Charitable Distributions” ( ¶ 7.6 ). Withdrawing funds or other assets from a retirement plan generally causes the value of the withdrawn property to be included in the recipient’s income. If the recipient then donates the withdrawn amounts to charity in the same year that he took the distribution, the income tax charitable deduction theoretically should eliminate the tax on the distribution. Unfortunately, the following obstacles often prevent the income tax charitable deduction from wiping out the tax cost of the distribution: A. Percent-of-income limit. The income tax deduction for charitable contributions is limited to a certain percentage (30% or 50%, depending on the type of property given and the type of recipient charity) of the individual’s gross income. § 170(b) . If the individual’s donations exceed the deduction limit, the excess can be carried forward for a limited number of years. B. Deduction-reduction for high-income taxpayers. Charitable deductions are an itemized deduction, subject to the “reduction of itemized deductions” that applies to high-income taxpayers in years before 2009 or after 2012. § 68 . The amount of the reduction is a