Life and Death Planning for Retirement Benefits

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Chapter 7: Charitable Giving 381
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 ; the penalty does not apply to distributions from an inherited plan.
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 and By giving the distribution
to charity, he gets both deductions.
A Qualified Charitable Distribution can be used to satisfy the distribution requirement in
any year when QCDs are permitted; see
7.6.03 Gifts from a pre-age 59½ “SOSEPP”
A 10 percent additional tax generally applies to retirement plan distributions taken before
reaching age 59½. see 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
, 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). The series must meet extensive IRS requirements; see
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.
7.6.04 Gift of NUA stock
The Code gives special favorable treatment to distributions of employer stock from a
qualified plan. Any increase in value of such stock, occurring while the stock is in the plan, over
the plan’s “cost basis” in the stock is called “net unrealized appreciation” ( NUA). Under certain
circumstances, NUA is not taxed at the time of the distribution; rather, taxation is postponed until
the stock is later sold. See
A retired employee who holds stock with not-yet-taxed NUA apparently has the same
options that other individuals owning appreciated stock have when they wish to diversify their
investments and/or increase the income from their portfolios: Either sell the stock, pay the capital
gain tax, and reinvest the net proceeds; or, contribute the stock to a Charitable Remainder Trust
reserving a life income, thus avoiding the capital gain tax and generating an income tax
deduction besides. It is advisable to obtain an IRS ruling if using this technique; see PLRs 1999-
19039, 2000-38050, and 2002-15032 for examples of use of this technique.