Thursday, April 18, 2024
GiftLaw Pro
GiftLaw Note: D passed away owning an IRA. D's estate is the named beneficiary of the IRA. D's will provided for a portion of the residuary of D's estate to be gifted to C, a public charity. E, D's executor, was given the power by will to make the distributions in any manner the executor saw fit. E requested a Letter Ruling allowing the distribution of D's IRA to charity C in satisfaction of C's interest in D's estate. Furthermore, E requested a ruling that the estate not be subject to tax due to the distribution. Sec. 691(a)(1) of the Internal Revenue Code includes in gross income "all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death...." Who pays this tax depends on who receives the asset. If a decedent's estate receives the asset, then the estate pays the tax. If the person who receives the asset obtains it by right of survivorship or the person inherits an asset from the decedent's estate, that person must pay income tax on the value of the asset. However, according to Sec. 691(a)(2), if the asset is transferred from the estate, then the estate is responsible for income tax on the IRD asset. Here, the Service found that distribution of the asset under the terms of a decedent's will did not amount to a transfer under Sec. 691(a)(2). Transfers under this section do not include "transmission(s) at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason a decedent's death or by bequest, devise, or inheritance from the decedent." Because C received the asset as a bequest, the estate did not want to pay income tax on the IRA.

Editor's Note: IRD assets make up a large portion of many estates. The manner in which these assets are distributed determines who pays the income tax associated with them. IRD assets include IRAs, 401(k)s, commercial annuities and many other common assets. Care should be exercised when creating an estate plan to minimize the effect of income tax on the estate and beneficiary.
Dear * * *:

This letter responds to a letter dated September 14, 2005, and subsequent correspondence submitted on behalf of Estate by its authorized representative, requesting a ruling under § 691 of the Internal Revenue Code.

The information submitted states that Decedent died on D1, owning an individual retirement account (the IRA). Decedent's estate (Estate) is the named beneficiary of the IRA. Decedent's will (the Will) names Charity as a residuary beneficiary. The executor of the Estate proposes to assign the IRA to Charity in partial satisfaction of Charity's share of the residue. The Will provides that the executors of Estate shall have the power "[t]o make payment, division or distribution required by this Will, either in cash or in kind, or partly in each, in such manner and such proportions as they shall deem appropriate, either with or without regard to the income tax consequences of any such sale to my estate or the income tax consequences of any such distribution to the beneficiary or beneficiaries receiving such property."

Section 691(a)(1) of the Code provides that the amount of all items of gross income in respect of a decedent (IRD) which are not properly includible in respect of the taxable period in which falls the date of the decedent's death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

Section 691(a)(2) provides that if a right, described in § 691(a)(1), to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of this paragraph, the term "transfer" includes sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.

Section 1.691(a)-4(b) of the Income Tax Regulations provides that if the estate of a decedent or any person transmits the right to IRD to another who would be required by § 691(a)(1) to include such income when received in his gross income, only the transferee will include such income when received in his gross income. In this situation, a transfer within the meaning of § 691(a)(2) has not occurred.

Section 1.691(a)-4(b)(2) provides that if a right to IRD is transferred by an estate to a specific or residuary legatee, only the specific or residuary legatee must include such income in gross income when received.

Rev. Rul. 92-47, 1992-1 C.B. 198, holds that a distribution to the beneficiary of a decedent's IRA that equals the amount of the balance in the IRA at the decedent's death, less any nondeductible contributions, is IRD under § 691(a)(1) that is includable in the gross income of the beneficiary for the tax year the distribution is received.

Based solely on the facts and representations submitted, we conclude that the assignment of the IRA to Charity in satisfaction of its share of the residue of Estate will not be a transfer within the meaning of § 691(a)(2). Only Charity will include the amounts of IRD in the IRA in its gross income when the distribution or distributions from the IRA are received by Charity.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code, including whether the IRA is qualified under § 408 or Charity is a § 501(c)(3) organization.

This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file, a copy of this letter is being sent to Estate's authorized representative.

Sincerely,

J. Thomas Hines, Chief, Branch 2
Office of the Associate Chief Counsel

Related Topics On Distribution of an IRA from Decedent's Estate in Satisfaction of Charity's Interest Does Not Subject Estate to Income Tax

3.2.1  Bequest Types:    Many bequests transfer a specific item to a beneficiary. For example, a will might state, "I hereby give and bequeath my 1958 Edsel to my nephew, Harold Johnson." This bequest has the effect of transferring this specific property to the named beneficiary.



© Copyright 1999-2024 Crescendo Interactive, Inc.