Sunday, May 5, 2024
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GiftLaw Note: Decedent died owning an interest in a defined benefit pension plan ("Plan"). The beneficiary of Plan was Decedent's estate ("Estate"), while Decedent's will named Charity as the residuary beneficiary of Estate. Decedent's Will gave the Executor the power to "make, partition, divi[de] or [distribute] property in kind" and state law permitted distributions in kind as well. Estate's Executor proposes to assign Decedent's interest in Plan to Charity as part of Charity's residuary share of the Estate.

The Service concluded that Executor's assignment of the Plan to Charity in partial satisfaction of its share of the residue of Estate is not a Sec. 691(a)(2) transfer and therefore, not includible in Estate's gross income. Income in respect of a decedent (IRD) is income not properly includible in respect of the taxable period in which falls the date of the decedent's death or a prior period. Under Sec. 691(a)(1)(A), if a decedent designates his or her estate as the beneficiary of IRD, the IRD will be included in the gross income of the decedent's estate. If, however, the estate distributes the right to the IRD to a beneficiary of the estate, the recipient beneficiary will include the IRD in his or her gross income according to Sec. 691(a)(1)(B). Sec. 691(a)(2) provides that if a 691(a)(1) right to IRD is transferred (exchanged, old, or otherwise disposed of), the value of the IRD at the time of transfer is included in the gross income of the transferor. Reg. 1.691(a)-4(b) explains that the transferee of an IRD at set under Sec. 691(a)(1) will include the IRD in their gross income when only received and Reg. 1.691(a)-4(b)(2) provides that if the asset is transferred by an estate to a specific or residuary legatee, only the legatee must include the IRD in gross income.

Editor's Note: The benefit in the Executor's transfer of the IRD Plan in-kind to Charity is that although the Plan is includible in Decedent's gross estate (because Decedent owned Plan at death), the Plan is not includible in Decedent's gross income. Furthermore, for any other recipient of an IRD, the IRD would be includible in the recipient's gross income, but here it is not because Charity is a tax-exempt entity.
Dear * * *:

This letter responds to a letter dated April 5, 2008, 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 interest in a defined benefit pension plan (the Plan Interest). Decedent's estate (Estate) is the beneficiary of this Plan Interest. Decedent's will (the Will) names Charity as a residuary beneficiary. The executor of the Estate proposes to assign the benefit of the Plan Interest to Charity in partial satisfaction of Charity's share of the residue. The Will provides that the executor of Estate shall have the power to "make, partition, divi[de] or [distribute] property in kind". State law further provides that the Executor may make distributions in cash, in kind or partly in each, "without being required to make pro rata distributions of specific 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.

Based solely on the facts and representations submitted, we conclude that the assignment of the Plan Interest to Charity in partial 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 Plan Interest in its gross income when the distribution or distributions from the Plan Interest 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 Charity is a § 501(c)(3) organization.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(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,

Bradford R. Poston
Senior Counsel
Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Related Topics On Pension Plan Assignment to Charity Excluded From Gross Income

4.6.3  IRA Bequests/Loans to Charity:    Nearly all IRAs are funded with pre-tax dollars. Many IRAs result from the rollover of other qualified plans at retirement. Payouts from these qualified plans would be ordinary income, and the participant rolls the plan over into an IRA to defer recognition of the income. Thus, the payment to IRA beneficiaries will generally produce ordinary income that is subject to taxation.



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