Life and Death Planning for Retirement Benefits

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Chapter 7: Charitable Giving 347
In many cases it is not feasible to name the intended charitable recipient directly as
beneficiary of the retirement benefits. The most common reason for this is that some additional
actions must be taken, after the client’s death, to carry out the charitable gift. For example:
 The intended charitable recipient may be a charitable foundation that has not been created
yet; or
 The amount going to the charity may be based on a formula that depends on facts that
cannot be determined until after the client’s death; or
 The client may want the charitable recipients to be selected after his death, with a
designation such as “The benefits shall be distributed to such one or more educational
institutions located in Indiana as my executor shall select from among those that are exempt
from federal income taxes under and gifts to which qualify for the federal estate tax
charitable deduction under ”
In all of these cases, the plan administrator may not be willing to accept a beneficiary
designation under which the administrator would not be able to tell, at the participant’s death, who
is entitled to the benefits.
If the only problem is that the actual charitable recipients are to be selected after the
participant’s death, consider leaving the retirement benefits to a “donor-advised fund” .
The participant should create the fund prior to death, name it as beneficiary, designate who will be
responsible for allocating the fund’s assets to charities after his death, and provide the allocators
with the guidelines they are to follow. Because the donor-advised fund is itself tax-exempt, the
problems discussed in the rest of this section do not arise—and the plan administrator is happy
because it knows to whom it must make the check payable.
In some situations, however, the benefits may have to be made payable to the participant’s
estate (or trust) as beneficiary of the retirement plan, with the Will (or trust instrument) specifying
that the benefits are to be paid to the not-yet-created (or not-yet-selected) charitable beneficiaries.
The executor or trustee is then responsible for carrying out the post-death actions (such as forming
the charitable foundation, calculating the formula distributions, or selecting the charities), and the
plan administrator can then simply follow the instructions of the executor (or trustee) in
distributing or transferring the benefits.
Unfortunately, this approach involves substantial additional complexity with respect to
required minimum distributions (se and fiduciary income taxes (see .
7.2.06 Leave benefits to charity through an estate
When it is not feasible to name a charity directly as beneficiary, there is an advantage to
leaving the benefits to the charity through the participant’s estate, rather than through a trust. An
estate is entitled to an income tax deduction for amounts either paid to or “set aside” for charity,
whereas generally a trust is entitled to an income tax deduction only for amounts “paid” to charity.
See B), (C). Thus, an estate may have a slight edge; but otherwise the income tax
complications of passing retirement benefits through an estate on their way to the charity are the
same as for a trust, and require expert knowledge, both at the drafting and administration stages.
See