question and one that I answer frequently.
The answer is yes. Probably the best reason to do so is philanthropic
reasons. The second, surprisingly second
in popularity to the first is tax benefits as well as ensuring an income stream
and potentially protecting your assets.
Let me go into greater detail for you:
for Creating Lifetime Charitable Gifts with Retirement Assets
Qualified Charitable Distribution from an IRA
known as an IRA Charitable Rollover, the Qualified Charitable Distribution from
an Individual Retirement Account (IRA) permits a person over age 70½ to direct
a charitable gift directly to a qualified charity from an IRA [IRC Sec.
408(d)(8)]. The charity must be a public charity or private foundation that may
receive general contributions (except not a Donor Advised Fund, nor a Sec.
509(a) Supporting Organization) and must otherwise qualify as a charitable
income tax deduction [IRC Sec. 408(d)(8)(B)(i)]. A person may direct up to
$100,000 per year in this manner. The distributed amount is excluded from
income so the taxpayer does not need to report the distribution as taxable
income for federal tax purposes. Furthermore, the distribution counts toward the
taxpayer’s annual required minimum distribution for tax-deferred accounts.
However, the distribution does not qualify for a charitable deduction [IRC Sec.
from an IRA to a Charity
instance of the creative use of an IRA to benefit a charity (though without any
charitable deduction) is the CHIRA or Charitable IRA plan. Note that a Private
Letter Ruling (PLR) cannot be relied upon by any person except the taxpayer to
whom it was issued, but it does provide an illustration of how an IRA and a
life insurance arrangement might work in tandem.
200741016, the donor proposed directing his IRA to lend a sum of money to a
qualified charity in return for a twenty year promissory note that pays 5%
annually. The note would be accelerated upon the death of the owner. A life
insurance policy owned by the charity on the life of the donor would provide
the collateral for the note. Under the terms of the note, in the event of the
donor’s death prior to the full payment of the note, the death benefit would
pay off the remaining payments owing under the note and the excess benefit
would go to the charity.
loan payments from the charity to the IRA would provide the needed cash for the
donor to take required minimum distributions from the IRA.
loan itself was an investment permitted under IRC Sec. 408 and not a prohibited
transaction. Nor did the purchase of a life insurance policy by the charity as
collateral on the note violate the prohibition on an IRA investing in life
insurance. However, the charity needs to establish an insurable interest in the
donor’s life under state law in order to meet the note requirements.
Charitable Gifts Made with Lifetime Distributions from Retirement Assets
plan withdrawals by a donor may be used to fund charitable gifts. Such
withdrawals may be used for direct cash gifts, or to establish a charitable
life income gift such as a charitable remainder trust (CRT) or charitable gift
annuity (CGA). The charitable deduction created by an outright gift or by the
creation of the CRT or CGA can reduce the income tax liability occasioned by
the withdrawal. If the charitable gift is a life income gift, the donor (or
someone selected by the donor) may receive payments during his or her
benefits of a charitable gift using the distribution from a retirement asset
would be to reduce the donor’s taxable estate by the value of the property
transferred, and to create an immediate income tax deduction for the present
value of the gift to the charity [IRC Sec. 170].
for Creating Testamentary Charitable Gifts with Retirement Assets
of the difficulty posed by both its estate and income tax liability, property
within an estate that contains Income in Respect of a Decedent (IRD) can be an
appropriate choice for charitable giving. In general, retirement assets such as
an IRA or 401(k) are IRD. And by properly donating this income as a bequest
through the estate, an individual generates both an estate tax charitable
deduction as well as an income tax charitable deduction for the estate. Non-IRD
assets may be better to bequeath to family or friends.
a Charitable Beneficiary
the old RMD rules, the beneficiary’s life expectancy was important because it
could stretch out the distribution period for the payments under an IRA or
qualified plan, and thereby allow a living owner to take smaller RMDs each
year. Since a charity has no life expectancy, naming a charitable beneficiary
did not stretch out the distribution period at all. A donor was essentially
penalized for naming a charitable beneficiary by being forced to take larger
distributions than would have been required if an individual beneficiary had
current regulations eliminated this treatment of charitable beneficiaries and
charitably inclined account owners. The lifetime RMDs for account owners are
now determined under the Uniform Lifetime Table regardless of the life
expectancy of the designated beneficiary (not forgetting the exception for a
spouse who is more than 10 years younger than the owner). This should encourage
more frequent use of IRAs and retirement plan assets for charitable giving
purposes – especially since the IRD advantage enjoyed by charitable
beneficiaries was unaffected by the RMD changes.
are effective ways to make a charitable bequest of an IRA or qualified
retirement plan asset:
the owner could designate the charity as the beneficiary for the retirement
plan or IRA. This designation controls the distribution of the account
(instructions left in a will or trust have no effect if the asset is not left
to the estate or the trust). The plan or account administrator will have a
beneficiary designation form for the owner to complete. This is the
straightforward way to do it.
the owner could leave the retirement plan or IRA to his estate or trust and
include language within the will or trust that permits the executor or trustee
to make income distributions and effectively claim the income tax charitable
deduction for the IRD asset that goes to charity.
Terminal Interest Property Trust with a Charity as the Remainder Beneficiary
Terminable Interest Property (QTIP) trusts qualify for the marital deduction
for federal estate tax purposes. A QTIP trust requires that all trust income
generated during the spouse’s life be paid to the spouse; no other beneficiary
may benefit from the trust during the lifetime of the spouse [IRC Sec.
2056(b)(7)]. To use an IRA to fund a QTIP trust would provide that the greater
of the IRA required minimum distribution or the income created by the IRA
account must be paid to the spouse at least annually during the life of the spouse.
the QTIP charitable trust arrangement, the first spouse to die (as grantor)
would mandate that the undistributed principal remain in the account. After the
death of the surviving spouse, the trust assets would go to charity as the
first spouse had directed by the terms of the trust. The value of such
principal would be taxed in the estate of the surviving spouse, but the value
of assets passing to charity would qualify for an estate tax charitable
is desirable to provide the surviving spouse with access to the principal of
the trust prior to the eventual transfer to the charity, the QTIP can be
drafted to permit such access. The value of the QTIP remaining at the spouse’s
death will be included in his or her estate; however, that value which is
transferred to the charity will give rise to an estate tax charitable
Remainder Trust with a Spouse as the Non-Charitable Beneficiary
wishing for the charity to have an interest that is clearly vested might prefer
to establish a Charitable Remainder Trust rather than a QTIP. When the account
balance is transferred to the CRT upon the account holder’s death, there will
be the estate tax charitable deduction for the value of the portion bequeathed
to the charity. The account holder’s estate will also be entitled to an estate
tax marital deduction with respect to the spouse’s income interest in the
assets transferred to the CRT. Since the charity is income tax-exempt, there
will be no income tax liability as a result of the transfer of the qualified
retirement plan or IRA assets to the CRT.
Charitable Remainder Trust (CRT) is used, either a fixed dollar amount
(Charitable Remainder Annuity Trust) or a specified percentage (Charitable
Remainder Unitrust) will be received at least annually by the non-charitable
beneficiary or beneficiaries [IRC Sec. 664(d)]. After their interest
terminates, the remaining assets will be paid to the charitable beneficiaries
named in the trust [Reg. Sec. 1.664-1(a)(1)(i)].
time the original account holder dies and assets pass to the CRT, the value of
the interest going to the surviving spouse as beneficiary will qualify for the
estate tax marital deduction and the value of the charitable remainder interest
will qualify for the estate tax charitable deduction. Any value of the IRA
remaining inside the CRT at the death of the surviving spouse will not be
taxable in his or her estate.
there may be a problem due to the inflexible nature of the CRT distributions to
the surviving spouse. But this inflexibility may not be troublesome if the
surviving spouse has other available wealth.
Remainder Trust with a Child as the Non-Charitable Beneficiary
account holder wishes to provide for his or her children through an IRA or
qualified retirement plan, the use of a CRT may be in some cases more
advantageous than an outright bequest of an asset to the child.
are several reasons why. One is that a bequest to a CRT will create an estate
tax charitable deduction, which could reduce estate taxes. Further, the
transfer of the IRA or qualified retirement plan to the CRT will not trigger
immediate income taxation. Income generally will be taxed to the beneficiary of
the CRT as it is received by him or her. A bequest to a CRT benefiting a child
may be limited or impractical, however, because of the requirement that at
least 10 percent of the value transferred to the CRT must represent the
charity’s remainder interest [IRC Sec. 664(d)(1)(D), 664(d)(2)(D)].
the IRA asset eventually passes to the charity following death of the
non-charitable beneficiaries or the expiration of the trust term, the asset is
essentially “lost” to the family. However, the reduced income and estate taxes
occasioned by the transfer of the IRA to the CRT may have preserved additional
principal in the IRA which will have generated additional income for the
non-charitable beneficiary. And using part of this income to replace the IRA
wealth by obtaining insurance on the lives of the beneficiaries is a
that the Sec. 691 income tax deduction attributable to the estate tax paid on
IRD does not pass through the charitable remainder trust to the non-charitable