Life and Death Planning for Retirement Benefits

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that Charity X has failed to withdraw from the account by September 30 of the year after the year

of my death) to my issue surviving me by right of representation.” Thus, he has guaranteed that

the life expectancy payout method will be available for his children, because (as of the Beneficiary

Finalization Date) they are the only beneficiaries of the IRA (because the charity has either

received or forfeited its share).

Now Richard has one more concern: This conditional IRA gift to charity may not entitle

his estate to an estate tax charitable deduction. To cover that gap, he puts the following bequest in

his Will: “I bequeath to Charity X the sum of $10,000, reduced by any amounts paid to the said

Charity from my IRA.” Thus, the estate tax deduction is assured, because the charity is guaranteed

to receive the $10,000 either from the IRA or from the probate estate. This is a complicated way

to deal with the problem, but every method has its drawbacks.

7.2.04

Formula bequest in beneficiary designation

Often, the amount a client wants to leave to charity is neither a fixed dollar amount nor a

fractional share of the retirement plan, but rather is derived from a formula based on the size of

the client’s estate and/or adjustments for other amounts passing to the charity.

Corey Example:

Corey wants to leave 10 percent of his estate to his church and the balance to his

issue. His assets are a $2 million IRA, a home worth $1 million, and other investments worth $3

million. Thus, based on present values, he would expect the church to receive about $600,000. One

way to accomplish that goal is to leave the charity 10 percent of the IRA and 10 percent of the rest

of the estate. That approach exactly carries out Corey’s intent of leaving 10 percent of all his assets

to the church. However, that is not the most tax-efficient way to fund the church’s share. As

explained a

B), without reducing the amount the church receives, Corey could leave more

to his children by funding the church’s share entirely from the IRA. His lawyer drafts a beneficiary

designation formula leaving the church a fractional share of the IRA equal to 10 percent of Corey’s

total estate, and leaving the balance of the IRA (if any) to Corey’s issue.

The first problem with a formula beneficiary designation is that the IRA provider may not

accept it. The IRA provider normally does not have the information needed to apply the formula.

For example, Corey’s IRA provider it has no way to determine what assets are in his estate; all it

knows is what is in the IRA. Also, the IRA provider typically charges a nominal fee for providing

custodial duties, and its services do not include calculating elaborate formula amounts.

Both these problems can be overcome, with some IRA providers, by specifying that the

participant’s executor or some other fiduciary will provide the formula amount to the IRA

provider, and that the IRA provider has no responsibility for verifying that the fiduciary’s figures

are correct. For example, one IRA provider requires any IRA holder who files a “customized

beneficiary designation” to supply, along with the beneficiary designation, an authorization that

allows the IRA provider to rely on representations by the participant’s executor.

If using this approach, make sure that the related trust document or will specifies that this

task is part of the duties the fiduciary undertakes by agreeing to be executor or trustee.

7.2.05

Leave benefits to charity through a trust