HOW TO STRUCTURE CHARITABLE BEQUESTS
OF IRD ASSETS, ESPECIALLY IRAs
Presented at
ALI-ABA ESTATE PLANNING IN DEPTH
University of Wisconsin Law School
Madison, Wisconsin
June 20, 2003
CHRISTOPHER R. HOYT
Professor of Law
University of Missouri - Kansas City School of Law
© Christopher R. Hoyt 2002 All Rights Reserved
i
CHARITABLE GIFTS AND BEQUESTS OF IRD ASSETS
(incl. IRAs, STOCK OPTIONS and SAVINGS BONDS)
TABLE OF CONTENTS
I.
Introduction
A.
II.
1
1
2
4
Charitable Bequests Of Retirement Plan And Other "IRD" Assets
6
6
6
7
Fundamental Concept
Definitions
Fundamental Planning Pointers
Overcoming Obstacles
A
B.
C.
D
E.
IV.
Lifetime Gifts
B. Charitable Bequests at Death
C. IRD Assets / Charitable Deductions on Estate Tax Returns
D. Combination of Estate and Income Taxes on IRD
A.
B
C.
III.
Introduction
Avoid Problems on the Estate's Income Tax Return
i)
Basic Strategy
ii)
Keeping the Income Off The Estate's Income Tax Return
iii)
Claim a Charitable Income Tax Deduction for IRD to Charity
Avoiding Problems with Mandatory IRA Distributions
IRD + CRT + Estate Tax = Problem
Other Miscellaneous Problems
Lifetime Charitable Gifts From IRAs and Qualified Retirement Plans
---- ESOP distribution to CRUT Strategy (employer stock)
V. How To Structure Charitable Bequests Under the Final
2002 IRA Required Distribution Regulations
A
B.
C.
D
D.
E.
VI .
Page
Introduction
Types of Qualified Retirement Plans
Minimum Distributions and the 50% Penalty Tax
Minimum Required Distributions -- the 2002 Regulations
i)
Required Lifetime Distributions
ii)
Required Distributions After Death
iii)
Glossary
Computation: Combination of estate tax and income tax on IRD
Inherited Distributions - When Deferral Doesn’t Make Sense
Legal Authority on Point: Mainly IRS Private Letter Rulings
(c) 2003 Christopher R. Hoyt All Rights Reserved
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13
13
14
16
20
23
25
25
27
28
28
29
30
34
40
41
46
WHO SHOULD USE CHARITABLE IRA ROLLOVER WHEN IT IS ENACTED
... AND WHO SHOULD NOT?
I. Current Tax Treatment of Lifetime Charitable Gifts from Retirement Accounts
Any lifetime charitable gift from any sort of retirement plan account (IRA, 403(b), 401(k), profit
sharing, etc.) must be reported on the account owner’s income tax return. The donor can then
claim an offsetting charitable income tax deduction.
Example: In October, Ms. Donor caused $10,000 to be transferred directly from her Sec.
403(b) tax-sheltered annuity to her favorite charity. She never touched the money. In
January she will receive a Form 1099-R that informs her that she must report a taxable
distribution of $10,000 on her income tax return. She can claim an offsetting $10,000
charitable income tax deduction as an itemized deduction.
II
Charitable IRA Rollover
If enacted, a person who has assets transferred directly from her or his IRA to a charity:
(1) will not have to report the distribution on an income tax return, and
(2) will not be entitled to claim a charitable income tax deduction for the gift. An exception
would permit a deduction for the portion of any distribution that would have been tax-free to the
IRA owner, such as a distribution of a non-deductible contribution that was made to the account.
III
Requirements for Charitable IRA Rollover
The exact details will depend on the legislation that is finally enacted by Congress, but it is clear
that there will be three basic requirements for people to make lifetime charitable gifts from IRAs
without having to report the distributions as taxable income:
A. Donor must be over a certain age. The exact age will be determined in the final
legislation. The minimum age will likely be between 59 ½ and 70 ½. Younger workers will not
be able to make charitable gifts from IRAs without reporting them on their tax returns.
B. IRAs only. Distribution to charities from other types of retirement accounts – such as
403(b) plans, 401(k) plans, profit sharing plans and pension plans – will still have to be reported
as taxable distribution to the account owners. Often this will not be an issue. Many retirees
rolled over their company retirement account assets into IRAs when they retired.
C. Directly to a charity .... or possibly to a deferred giving arrangement. The money must
go straight from the IRA to the charity. If a check is paid to the IRA account owner and then
endorsed to the charity, it will be treated as a taxable distribution to the IRA account owner. The
Senate proposal would also permit IRA distributions to be made to charitable remainder trusts,
pooled income funds and to charities to acquire charitable gift annuities. President Bush’s
budget proposal would only permit outright charitable gifts.
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IV
Impact on Outright Charitable Gifts
A.
Who Wins The Most If Charitable IRA Rollover Is Enacted?
•
Donors who do not itemize deductions (2/3s of the nation’s taxpayers). The charitable
contribution deduction is an itemized income tax deduction. Donors who do not itemize
currently have the worst tax result when they use IRA distributions for charitable gifts.
They have taxable income from the distribution but no offsetting charitable tax
deduction.
•
Donors who want to make very, very large gifts. A donor who wants to make a very
large gift (e.g., to endow a chair at a university) from an IRA will usually incur a tax cost
because of the deduction limitations and phase-outs described below.
•
Donors subject to the charitable deduction limitation. Charitable deductions cannot
exceeds 50% of a taxpayer’s adjusted gross income (“AGI”) in any year.
•
Donors with AGI above about $150,000. As a person’s income increases, there is a 3%
phase-out of itemized deductions and also a phase-out of the $3,000 personal exemption
deduction. By making charitable gifts with IRAs, donors will be able to keep their AGI
down and deduct more of their itemized deductions and their personal exemptions.
•
Donors who experience a phase-out of specific itemized deductions as their AGI
increases. Taxpayers who claim certain types of tax deductions find that these
deductions decrease as their income increases. Using an IRA for charitable giving will
help keep their AGI lower and will allow them to deduct greater amounts that would
otherwise be phased out. The phase-outs are:
•
2% for “miscellaneous itemized deductions” (employee and investment expenses)
•
7 ½% for medical expenses
•
10% for nonbusiness casualty losses (e.g., damage to a vacation home)
•
Donors who live in states with a state income tax that provides no tax breaks for
charitable gifts. For example, in Ohio a person’s state income tax liability is based on
federal AGI rather than federal taxable income. Normally an Ohio resident gets no state
income tax break from a charitable gift. Charitable IRA rollover will be a benefit.
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FEDERAL TAX COST UNDER CURRENT LAW OF
A CHARITABLE GIFT MADE FROM A RETIREMENT PLAN DISTRIBUTION
Married Couple With Adjusted Gross Income (“AGI”) Of $100,000,
2 personal exemptions and $14,000 itemized deductions
IRA distribution to charity:
$10,000
New Adj. Gross Income ("AGI") $110,000
No Gift
Itemized
14,000
14,000
Charit Deductions
10,000
Charit Carryfwd
0
Pers Exemp
6,000
6,000
3% cutback
0
0
Taxable Income 80,000
Tax
Cost of Gift
Cost as % of Gift
80,000
$15,403
$100,000
$200,000
$200,000
$300,000
$500,000
$600,000
$1,000,000
$1,100,000
14,000
150,000
50,000
1,440
-4,881
14,000
300,000
200,000
0
-13,881
14,000
550,000
450,000
0
-28,881
14,000
100,000
0
6,000
-1,881
81,881
$15,403
139,441
$15,903
$0
0.0%
299,881
$32,243
$500
$16,840
0.5%
8.4%
564,881
$86,771
$188,803
$71,368
14.3%
$173,400
17.3%
Married Couple With Adjusted Gross Income (“AGI”) Of $200,000,
2 personal exemptions and $14,000 itemized deductions
IRA distribution to charity
$10,000
New Adj. Gross Income ("AGI") $210,000
No Gift
Itemized
14,000
14,000
Charit Ded
10,000
Charit Carryfwd
0
Pers Exemp
6,000
6,000
3% cutback
-1,881
-2,181
$100,000
$300,000
$200,000
$400,000
$500,000
$700,000
$1,000,000
$1,200,000
14,000
100,000
0
1,440
-4,881
14,000
200,000
0
0
-7,881
14,000
350,000
150,000
0
-16,881
14,000
600,000
400,000
0
-31,881
Taxable Income
181,881 182,421
189,441
193,881
352,881
617,881
Tax
$45,471 $45,660
$48,117
$49,671
$106,971
$209,261
Cost of Gift
Cost as % of Gift
$189
1.9%
$2,646
2.6%
v
$4,200
2.1%
$61,500
12.3%
$163,790
16.4%