Naming a charity as beneficiary of retirement plan assets.

• Author: Schooley, Rita L.

Estate plans that intend to include charitable donations should consider transferring account balances of qualified retirement plans or of individual retirement accounts (IRAs) to a charity of choice. This planning strategy enables the estate to take a charitable deduction as well as escape income tax. Designating a charity as the beneficiary of an IRA or a retirement plan can minimize both estate and income taxes while allowing a transfer of other assets to noncharitable heirs. Another strategy is to use a charitable remainder unitrust (CRUT). With a CRUT, the spouse can receive the income from a retirement plan or IRA while passing the principal to the charity free of estate tax. This also minimizes the income tax impact and the spouse is taxed only as the unitrust amount is paid annually. It is also possible to designate someone other than the spouse as the income beneficiary, but the estate tax deduction is reduced accordingly.

Normally, amounts received as a beneficiary of an IRA or a retirement plan are income in respect of a decedent (IRD) under Sec. 691 and are therefore included in the recipient's gross income when received. However, Sec. 2055 allows a charitable deduction for estate tax purposes when the complete interest in property is transferred to a governmental entity or to a charity exclusively for religious, charitable, scientific, literary or educational purposes.

A simple estate planning technique is to designate a charity as beneficiary of the IRA or retirement plan (spousal consent is required for such a designation from most qualified plans). The estate receives a charitable deduction while the charity is not taxed on the amounts received from the IRA or qualified plan (since it is not unrelated trade or business income).

A more complex plan would involve naming a CRUT as the beneficiary of the IRA or retirement plan. CRUTs, as described in Sec. 664, allow a charitable deduction for the present value of the remainder interest. The trust term cannot be longer than 20 years or, if less, the life of the income beneficiary. In a unitrust, the income beneficiary must receive at least annually the sum of --the lesser of a percentage of the net fair market value of trust assets on the annual valuation date (but not less than 5%), or the trust income for the tax year; and --the trust income for the tax year in excess of the unitrust amount for such year, to the extent the aggregate amounts actually paid in prior years are less...