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Wednesday, April 24, 2024
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GiftLaw Pro |
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GiftLaw Note:
IRAs and deferred annuity contracts benefit from tax-deferred growth. While funds are held in the IRA or annuity contract, they may grow tax-free. However, in nearly all cases, distributions to beneficiaries require recognition of ordinary income. If an IRA or deferred annuity is passed from an estate to a beneficiary, there is income in respect of a decedent (IRD). The IRD does not receive a step up in basis to fair market value. Rather, the beneficiary will recognize ordinary income upon receipt of the IRD.
In this ruling, the estate included both IRD and non-IRD assets. Presumably, taxable beneficiaries may have received distributions that included both specific bequests and fractional shares of the residuary. Funding specific pecuniary bequests with IRD will produce taxable gain to the estate.
But in probate court jurisdictions that permit a non-pro rata distribution, the taxable beneficiaries will greatly prefer the non-IRD assets. However, since the IRD from an IRA or deferred annuity is passive income exempt from unrelated business taxable income under Sec. 512-514, the charities are quite willing to receive the IRD. In this ruling, the Service permitted the executor to make a non-pro rata allocation of IRD to charity in satisfaction of a residuary bequest.
It is also noteworthy that the deferred annuities had not yet reached the annuity starting dates. It is uncertain whether or not the Service would permit such an allocation then, since it might invoke the "ripened asset" doctrine to tax the estate on the IRD. However, if the distribution is a fractional share and the probate court permits the non-pro rata distribution, there still should be an avoidance of IRD on that transfer to charity.
Editor's note: It is good drafting strategy to permit the executor to allocate IRD to fractional bequests to charity. While most IRD should be transferred by a beneficiary designation to family members, charities or trusts, even with good planning some IRD assets may be distributed to an estate.
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This letter responds to your letter dated February 25, 2004, and subsequent correspondence, submitted by you as the executors of Estate, requesting a ruling under the Internal Revenue Code.
The information submitted states that Decedent died on D1, owning individual retirement accounts (the IRAs) and deferred annuity contracts (the Contracts), with Decedent's Estate designated as beneficiary. None of the Contracts had reached their annuity starting date as of D1. Estate has not surrendered or cashed any of the IRAs or the Contracts.
Decedent's will names Charity, represented as being an organization described in § 501(c)(3), as a residuary beneficiary. The executors of Estate propose to assign the IRAs and the Contracts to Charity in satisfaction of Charity's share of the residuary Estate. Decedent's will, as construed by Court in an order dated D2, permits this non-pro rata distribution.
Based solely on the facts and representations submitted, we conclude that the assignment of the IRAs and Contracts to Charity in satisfaction of its share of the residuary Estate will not cause Estate or any beneficiary of Estate to have any taxable income or cause Estate to include any amount in its distributable net income.
Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
Sincerely,
J. THOMAS HINES
Chief, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
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