Sunday, May 5, 2024
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GiftLaw Note: Decedent passed away owning an IRA of which Individual was the sole beneficiary. Decedent's will directed that several gifts be made to three charitable organizations, but did not specify the assets to be used to satisfy the bequests. Individual timely filed a qualified disclaimer of the IRA, leaving Decedent's estate as the sole beneficiary of the IRA. The Court approved Executor's petition to amend Decedent's will to designate the IRA as the source of the charitable bequests. Executor requested a ruling that the amount of the IRA transferred to the charities in satisfaction of Decedent's bequests would not be included in the gross taxable income of the estate under Sec. 691.

Sec. 691(a)(1) provides that items of income in respect of a decedent (IRD) not properly included in income prior to death will be included in the taxable income of the decedent's estate, the party receiving the right to the asset from the estate, or the party inheriting the IRD asset by direction of the estate. According to Sec. 691(a)(2) and the accompanying regulations, if the right to the IRD asset is transferred by the estate, the gross income from that portion of the IRD asset shall be reported by the estate.

However, the term "transfer" within the meaning of this section does not include transmission at death to a party pursuant to a right to receive the asset by reason of death of the decedent. Reg. 1.691(a)-4(b)(2) provides that if a right to an IRD asset is transferred to a specific legatee, only the legatee must include the IRD asset in income. The Service determined that transfer of the IRA in satisfaction of the bequest will not be a transfer within the meaning of Sec. 691(a)(2). Therefore, only the charities will include the amounts transferred to them in gross income. Because the IRA is not unrelated business taxable income and the charity is exempt, there is no payment of income tax on the IRA.
Dear * * *:

This responds to a letter dated March 10, 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 Date 1, owning an individual retirement account (IRA), which designated A as the sole beneficiary of the IRA. However, Decedent's will provided for certain charitable bequests to Charity 1, Charity 2 and Charity 3. The will of Decedent did not specify the intended funding source of the charitable bequest. A timely filed a qualified disclaimer of the IRA. Lacking a named beneficiary, the executor of Decedent's estate represents that under relevant state law, Estate is therefore the beneficiary of the IRA. On Date 2, Court approved a Motion to Reform Decedent's will, to designate the IRA as the source of the respective charity's specific shares of Estate.

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 partial assignment of the IRA to Charity 1, Charity 2, and Charity 3 in satisfaction of their specific share of Estate will not be a transfer within the meaning of §691(a)(2). Only Charity 1, Charity 2, and Charity 3 will include the amounts of IRD of the IRA assigned to them in their gross income when the distribution or distributions from the IRA are actually received by Charity 1, Charity 2, and Charity 3.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transaction described above under any other provisions of the Code, including whether the Charities are §501(c)(3) organizations.

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,

David R. Haglund
Senior Technician Reviewer
Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Related Topics On Creative IRA Transfer to Charities

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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