Life and Death Planning for Retirement Benefits

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340 Life and Death Planning for Retirement Benefits
C. Accomplish other estate planning goals. Judicious use of charitable giving with
retirement benefits can help the client accomplish other estate planning goals at the same
time as he fulfills his charitable intentions. See
D. Drawbacks, limitations. Leaving taxable retirement plan benefits to charity is not a
“perfect” estate planning idea:
 For one thing, it is not always true that an individual beneficiary will have more money
at the end of the line if he inherits after-tax assets rather than the same nominal amount
of retirement plan assets. A young individual who inherits a retirement plan and makes
maximum use of the life-expectancy-of-the-beneficiary payout method to “stretch” the
distributions over his life expectancy may end up with more dollars than if he had
inherited the same amount of after-tax assets, due to the power of income tax deferral.
See
 The minimum distribution rules make this planning idea self-limiting. If a participant
who has named a charity as beneficiary of his retirement plan lives long enough, the
minimum distribution rules (see will have forced out most of the plan’s
value, and there will be little left for the charitable beneficiary. A retirement plan’s
value tends to start shrinking significantly due to required distributions in the
participant’s mid-90s. A long-lived charitably inclined participant should consider
giving his RMDs to charity each year (see , and/or revising his estate plan to
leave other assets to the charity to make up for the diminished retirement plan.
7.1.03 Charitable pledges (and other debts)
If the client names one of his creditor as beneficiary of his retirement benefits, so that the
benefits will be used to satisfy the client’s debt to that creditor, paying the benefits to the creditor
would generate taxable income to the client’s estate. Although generally retirement benefits are
taxed to the person who receives them see , the IRS would say that the estate
“received” the IRD, because the estate’s debt was canceled when the benefits passed to the
creditor.
A charitable pledge that remains unfulfilled at death may, depending on applicable state
law, constitute a debt enforceable against the estate. See, e.g., Robinson v. Nutt , 185 Mass. 345, 70
N.E. 198 (1904) (unpaid written charitable subscription enforced as a debt against the estate due
to charity’s reliance), and King v. Trustees of Boston University , 420 Mass. 52, 647 N.E. 2d 1196
(1995). However, a charitable pledge is not considered a debt for federal income tax purposes.
Rev. Rul. 64-240, 1964-2 C.B. 172. Therefore, leaving retirement benefits to a charity in fulfilment
of the decedent’s lifetime charitable pledge will not cause the estate to realize income when the
charity collects the benefits, regardless of whether the pledge was enforceable as a debt against the
participant’s estate.
7.2 Seven “Hows”: Ways to Leave Benefits to Charity
Here are the seven ways retirement benefits can pass, upon the participant’s death, to a
charitable beneficiary.
7.2.01 Name charity as sole plan beneficiary