RETIREMENT PLAN GIFT

Retirement plan assets (e.g., interests in qualified plans and IRAs) often are a significant portion of an individual's taxable estate. These assets are income in respect of a decedent ("IRD") and subject to income tax when received by the owner or beneficiary. Because the combined estate and income taxes imposed on these assets may consume much of the plan balance, planning for their distribution is imperative. A charitable bequest of retirement plan assets is one alternative for minimizing the taxes imposed.

Retirement Plan Assets to the Society - When a donor has accumulated significant amounts in a retirement plan or IRA, one strategy to minimize tax under the IRD rules is to use retirement plan benefits to fund charitable contributions. Assets transferred to charities are sheltered from estate and gift tax because of the unlimited charitable deduction, and are deductible for income tax purposes as well (although certain limitations may apply.) Donors that desire to make charitable bequests at their death should consider using retirement plan assets. In this situation, the estate avoids recognizing taxable income related to the IRD items. Instead, the charity receiving the IRD recognizes the income but pays no income tax because it is tax exempt. In addition, the estate receives an estate tax charitable deduction equal to the fair market value of the donated IRD items. Thus, it owes no estate tax or income tax on the IRD items.

Example:
Sam had a $2,000,000 retirement plan account at the time of his death (the entire $2,000,000 is IRD.) Sam's Last Will and Testament makes a bequest of the plan assets to the Society. The Society will recognize the IRD when it receives the plan assets; however, it will not pay tax on the distribution because of its tax-exempt status. In addition, the estate receives a S2,000,000 estate tax charitable deduction and does not report the $2,000,000 IRD for income tax purposes.

If Sam had left the Society S2,000,000 in cash instead, his estate would still receive a $2,000,000 estate tax deduction, but would have to report the $2,000,000 RD for income tax purposes when the plan assets were received. Thus, the balance of the estate available to non-charitable beneficiaries would have been reduced not only by the $2,000,000 charitable bequest but also by the estimated $800,000 income tax paid on the $2,000,000 of IRD.

Example:
Under the rules governing her company's profit-sharing plan, Anne's account must be distributed within five years after her death. She estimates that when she dies, the account balance could be at least $200,000. If she were to name her daughter, Sandy, as the beneficiary, the entire amount would go to Sandy as ordinary, taxable income, incurring probable federal and state income taxes of more than $40,000. In addition, a federal estate tax of more than $90,000 would be due if Anne's other assets equaled more than the amount exempt from estate tax. Less than $70,000 of the $200,000 could be left for her daughter after payment of all the taxes!

Instead, Anne creates a charitable remainder unitrust and names it as the beneficiary of her profit-sharing plan. She arranges for the unitrust to pay 7% of the value of the assets to Sandy each year for life. The net result is significant income tax deferral. The entire $200,000 can be invested to produce investment income. The estate tax on the value of Sandy's interest would typically be paid from other assets. The partial estate tax charitable deduction for the present value of the charitable remainder interest will reduce Anne's estate tax.