Life and Death Planning for Retirement Benefits

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368 Life and Death Planning for Retirement Benefits
 Use fractional rather than pecuniary formulas to define the charitable gifts, if
possible. This allows the fiduciary to fulfill the gift by transferring the retirement benefits
intact to the charity, as described in
7.5 Seven “Whiches”: Types of Charitable Entities
The Tax Code recognizes various types of charities and “split-interest” partially-charitable
entities, not all of which are income tax-exempt. This explains which charitable entities are
and are not suitable to be named as beneficiaries of traditional (taxable) retirement plan death
benefits.
7.5.01 Suitable: Public charity
provides an income tax exemption for a lengthy list of organizations, including clubs,
burial societies, employee benefit plans and, i the type of organization people usually
mean when they refer to “charities”: “Corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or to foster national or international amateur sports competition
(but only if no part of its activities involve [sic] the provision of athletic facilities or equipment),
or for the prevention of cruelty to children or animals, no part of the net earnings of which inures
to the benefit of any private shareholder or individual,” and which does not engage in certain
proscribed political activities. The definition is similar, though not identical, for
(estate tax deduction for bequests to charity). These organizations are referred to in this Chapter
as “public charities,” meaning 501(c)(3) organizations that are not private foundations .
A public charity is exempt from income tax (except for the tax on “unrelated business
income” or “UBTI”) Bequests to public charities qualify for the estate tax deduction,
up to the value of such property included in the gross estate.
Lifetime gifts to such charities are deductible for gift tax purposes . Lifetime
gifts to domestic charities qualify for the income tax charitable deduction Gifts to some
charities qualify for a larger deduction (as a percentage of the donor’s gross income) than others,
but this distinction is irrelevant to at-death gifts.
Making a bequest of retirement plan death benefits directly to a public charity presents the
fewest problems. The planner needs to verify that the organization is an exempt organization under
and for a major gift the planner should review each of the Code sections under which
a deduction will be claimed, to make sure that the organization in question meets the requirements.
This is not generally a problem in the case of gift by a U.S. citizen to typical charities.
7.5.02 Suitable: Private foundation
In general, a private foundation is a “501(c)(3) organization” that is primarily
supported by contributions of one donor or family. However, the definition of a private foundation
is notoriously convoluted (see , especially since there are several different types and not all
are subject to the same restrictions. Untangling the various definitions and subsets of private
foundations is beyond the scope of this book.