Life and Death Planning for Retirement Benefits

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382 Life and Death Planning for Retirement Benefits
7.6.05 Gift of other low-tax lump sum distribution
“NUA” is not the only special tax deal available for qualifying lump sum distributions
(LSDs). An LSD to a participant who was born before January 2, 1936 (or to the beneficiaries of
such a participant) qualifies for a special tax treatment under which the distribution is excluded
from the recipient’s gross income and taxed under a separate rate schedule. This schedule would
typically produce a lower-than-normal tax on LSDs up to a few hundred thousand dollars. See
The special tax treatment for LSDs has a mixed effect on charitable giving. The effect may
be favorable: Since the LSD is excluded from the recipient’s gross income, the recipient may be
able to pay the low LSD rate on the distribution, give the distribution to charity, and deduct the
gift from his other income, thus saving taxes at his regular income tax rate. Or the effect may be
unfavorable: If the distribution is large enough, excluding it from gross income may cause a large
charitable gift to exceed the percentage-of-AGI limits on charitable deductions A)).
7.6.06 Give ESOP qualified replacement property to CRT
The Code allows a business owner, if various requirements are met, to sell stock of his
company to an “employee stock ownership plan” (ESOP), then reinvest the proceeds in marketable
securities (“qualified replacement property”), without paying income tax on the sale The
untaxed gain carries over to the qualified replacement property and the capital gain tax thus
deferred will be paid when the taxpayer “disposes of” the qualified replacement property.
A disposition of the qualified replacement property “by gift” does not trigger this recapture
provision, but since the Code doesn’t define “gift,” there is some question whether transferring
qualified replacement property to a Charitable Remainder Trust (which is not totally a gift if the
donor retains an income interest) is considered a gift for this purpose. PLR 9732023 answered this
question favorably to the taxpayer involved in that ruling, concluding that “the contribution of the
qualified replacement property to the charitable remainder unitrust will not cause a recapture of
the gain deferred by the Taxpayers under section 1042(a)....”
Unfortunately, even aside from the fact that a private letter ruling cannot be relied on as
precedent, the language of the ruling is ambiguous and limited. It says: “In the present case, the
transfer of the [qualified replacement property] to the charitable remainder unitrust constitutes a
disposition of such property within the meaning of section 1042(e) of the Code. However under
the facts of the present case, no gain is realized by the Taxpayers on the transfer...,” with no
indication of why no gain is realized. Presumably the rationale is that the transfer is a gift, and
therefore excepted from the recognition of gain.
7.6.07 Qualified Charitable Distributions
In a year when “qualified charitable distributions” (QCDs) are permitted, an IRA owner or
beneficiary who is older than age 70½ can transfer funds directly from his IRA (or inherited IRA,
as the case may be) to charity without having the distribution be reportable as a distribution to
himself. Here are the limitations and restrictions on QCDs:
A. When. Originally enacted as a temporary measure (good for IRA distributions in 2006 and
2007 only), was extended in late 2008 for two more taxable years (2008 and
2009) In December 2010 was extended for two more years
(2010–2011). The American Taxpayer Relief Act of 2012 (ATRA) extended them again,