Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

in some cases). See Chapter 1 . If the participant does not need his RMDs for other purposes, this would be an appropriate source of charitable gifts. The drawbacks listed at ¶ 7.7.01 still apply, but since he has to take the unneeded RMD anyway, he might as well give it to charity; and in most cases he will receive some income tax benefit from the charitable gift. A pledge to “give my RMDs to charity” would especially make sense for someone who is planning to leave the balance of the account to charity at his death. A beneficiary who has inherited a retirement plan is also generally required to take annual RMDs from the plan. If a beneficiary does not need the distributions from an inherited retirement plan, he might consider giving them to charity. Ideally, the participant should have left the benefits directly to charity in the first place, rather than leaving them to a rich beneficiary who does not want them. However, if that did not happen, and the beneficiary is receiving a stream of unneeded RMDs, the beneficiary could reduce his income tax liability by giving the distributions to his favorite charity as he receives them. This approach is especially appropriate for a younger wealthy donor, who generally cannot take distributions from his own retirement plan without paying a 10 percent penalty (see ¶ 7.7.03 ); the penalty does not apply to distributions from an inherited plan. § 72(t)(2)(A)(ii) . If the participant’s estate was subject to federal estate taxes, the beneficiary is entitled to an income tax deduction (the “IRD deduction”) as he takes distributions from the inherited plan, for the estate taxes attributable to that plan. See § 691(c) and ¶ 4.6.04 . By giving the distribution to charity, he gets both deductions. A Qualified Charitable Distribution can be used to satisfy the distribution requirement; see ¶ 7.6 . A 10 percent additional tax generally applies to retirement plan distributions taken before reaching age 59½. § 72(t) ; see Chapter 9 for details regarding this penalty and its exceptions. A young individual who wanted to give some of his retirement benefits to charity would be discouraged from doing so by this penalty. This penalty does not apply to death benefits ( § 72(t)(2)(A)(ii) ), so it affects only participants, not beneficiaries. One of the more than a dozen exceptions to this penalty is well suited for fulfilling a pledge of annual gifts to a charity. It is called the “series of substantially equal periodic payments” (SOSEPP). § 72(t)(2)(A)(iv) . The series must meet extensive IRS requirements; see ¶ 9.2 – ¶ 9.3 . Cornelia Example: Cornelia, age 52, has $3 million in a rollover IRA, and $10 million outside of the IRA, of which more than $9 million is in real estate. She has pledged $100,000 a year for 10 years to her favorite charity. She would like to take this money out of her IRA rather than diminish the smaller pool of liquid funds she has outside her retirement plans. Working with her accountant, she determines that an IRA of $1.6 million would support a “SOSEPP” of approximately $100,000 a year for someone her age, based on the IRS-prescribed methods, interest rates, and actuarial assumptions. She divides her $3 million IRA into two separate IRAs, one holding $1.6 million and the other $1.4 million. She starts taking annual distributions of $100,000 from the $1.6 million IRA, penalty-free, and uses those distributions to fund her charitable pledge. Gifts from a pre-age 59½ “SOSEPP”

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