Wednesday April 24, 2024
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4.6.3 IRA Bequests/Loans to Charity
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IRA Ordinary Income
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.
With the growth in IRAs and pension plans, the percentage of estate value that is an IRA is also growing. Especially for professionals, business owners and nonprofit employees, 30% to 80% of an estate could consist of IRAs or other retirement plans. If donors with large IRAs desire to transfer an inheritance to children and leave a bequest to charity, the preferred method is to transfer part or all of an IRA to charity and leave non-IRD assets to the children.
Charities Receive IRAs Tax Free
Since charities are exempt from income tax, a charity can receive the entire IRA and avoid payment of the income tax. For example, a $100,000 IRA may be transferred to a charity and the charity will receive the full $100,000. However, if the $100,000 were transferred to a child (subject to their parents' 37% tax rate), cashing out the IRA would produce a tax of $37,000 and $63,000 would remain. Even with the former "stretch" option, the child would eventually pay a substantial tax on the ordinary income.
There are two distribution provisions that facilitate IRA bequests to charities. First, if an IRA is designated in part to family and a fractional part to charity, the IRA owner still is permitted to use the Uniform Lifetime Table to calculate minimum required distributions. There is no change in the RMD with a charity as the designated beneficiary.
Second, the designation date is September 30 of the year after the IRA owner passes away. Therefore, if 10% of an IRA is designated to a qualified charity and this amount is distributed to the charity prior to September 30 of the year after death, the charity is no longer a designated beneficiary. The remaining designated beneficiaries may then receive income over the ten-year period.
Example 4.6.3A IRA Bequest with Moderate-Size Estate
John Bequest has an estate of $800,000 and therefore will not have to be concerned about paying estate taxes. $200,000 of his estate is an IRA. Since John desires to benefit his favorite charity, he selects favorite charity as the designated beneficiary. Under the Uniform Lifetime Table, this does not have any impact on his RMD. When John passes away, the family receives the majority of his estate, comprised of his home, CDs and bonds. The favorite charity receives the $200,000 IRA. This saves over $60,000 in income tax, since the charity is tax exempt.
Saving Both Income and Estate Tax
If an individual has an estate subject to estate tax, the IRA could be subjected to both estate tax and income tax. While there is a Sec. 691(c) deduction on income tax for a portion of the estate tax paid, there still may be a very substantial total tax rate due to the double taxation. For example, the individual could pay estate tax on the IRA and the beneficiaries could be subject to an income tax. Even with the 691(c) deduction, the combined tax rate can approach 60%. Therefore, for individuals with large estates, a bequest of an IRA to charity could save 60 cents on the dollar. This might be the most cost-effective way to make a transfer to charity.
Example 4.6.3B Major Estate IRA Bequest
Mary Bequest has an estate of $17 million. She has an IRA of $700,000. Since Mary desires to give her IRA to favorite charity, she selects the favorite charity as the designated beneficiary of the IRA. The $700,000 bequest of the IRA saves over $400,000 in income and estate taxes.
When Mary passes away, her estate receives a $700,000 charitable deduction and the remaining amount over and above her exemption is subject to tax. The non-IRD assets, less estate tax costs, are distributed to family. The charity receives the $700,000 and saves both the estate tax and the income tax on this distribution. Total tax savings are over $400,000. This is very cost-effective giving.
How to Collect Charitable IRA Beneficiary Designations
Traditional IRAs are funded with pretax dollars and grow tax free. Many traditional IRAs are created through rollovers of other types of qualified plans at retirement. The payouts from traditional IRAs are ordinary income because these IRAs are funded with pretax dollars.
IRAs and other qualified retirement plans now equal approximately one-fourth of household net worth.
IRA and 401(k) Bequests to Charity
With substantial retirement plan values, there are obvious benefits for charitable individuals who transfer IRAs or 401(k) plan to charity through beneficiary designations. Because the 2024 estate exemption of $13.61 million eliminates estate or gift tax for 99.8% of estates, the typical tax on bequests to children and other beneficiaries is income tax on traditional IRAs and other qualified plans.
The taxwise inheritance plan for a parent who wants to benefit both family and charity is to make charitable transfers through an IRA, 401(k), 403(b) or other qualified retirement plan. Because charities are exempt from tax, they may receive an IRA or other qualified plan tax-free. If given their choice, children or other heirs would prefer to receive the home, stocks, land or other assets. These assets receive a step-up in basis under Sec. 1014. Children and other heirs generally will avoid payment of income, capital gains or estate tax on their inheritance.
However, if a parent transfers the home, stocks or land as a bequest to charity and leaves the IRA to children or other family members, they will pay a large (and unnecessary) income tax. If they were given the choice, the children or other heirs would always take the tax-free assets and prefer that the charitable transfer be funded through a traditional IRA or other qualified plan.
The Investment Company Institute estimates $9.4 trillion is held in IRA accounts. This value suggests there is a significant potential for both IRA rollovers and for IRA beneficiary designations. With 32% of IRA balances held by persons who are age 70½, there is approximately $3 trillion in IRAs and $1.7 trillion in 401(k) assets that potentially may be used for qualified charitable distributions (QCDs). The 401(k) assets would need to be rolled over into an IRA, and then could be used for QCDs.
If the target market group is age 60 and above, the potential is even larger for IRA or 401(k) beneficiary designations to charity. The DQYDJ.com analysis suggests that 58% of total IRA and 401(k) assets are held by persons age 60 and above. These IRA and 401(k) owners could designate charity as the beneficiary of a portion of their $5.37 trillion in IRA assets and $3.1 trillion in 401(k) assets.
IRA and 401(k) Potential Value for Charity
The key to receiving these IRA rollover gifts is a multichannel marketing program with both electronic and print components. If charities have effective multichannel marketing programs and donors over age 60 designate 2% of their IRAs and 401(k)s to charity, then the amount of gifts may equal $166 billion. Because IRAs and 401(k)s continue to grow in value, this $166 billion amount could be substantially greater by the time the individuals age 60 and over pass away.
IRA is a Trust for an Individual
IRAs are governed by Sec. 408 and Reg. 1.408 of the Internal Revenue Code and Regulations. The IRA is a trust created for the "exclusive benefit of an individual or his beneficiaries." See Sec. 408(a). It must be a "trust created or organized in the United States (as defined in Sec. 7701(a)(9)) for the exclusive benefit of an individual or his beneficiaries." Reg. 1.408-2(b).
The IRA may be designated to charity. If the IRA owner designates a portion of the fund to children and a portion to charity, in order to permit children to qualify as Designated Beneficiaries and follow the 10-year distribution plan the IRA amount should be distributed to charity by September 30 of the year after the IRA owner passes away. Reg. 1.401(a)(9)-4. IRA distributions and reporting are described in IRS Pub. 590-B. When the IRA is distributed to an individual or a charity, the custodian will file IRS Form 1099-R. With the rapid growth in the number of IRA designations to charities, many nonprofits have encountered problems with the transfer from custodians to charities upon demise of the IRA owner. Some IRA custodians may require the charity to setup an IRA account, claim that the charity is subject to provisions of the Patriot Act or decide to withhold 10% of the IRA to pay income tax. Charities and their counsel must understand the correct responses to these claims in order to expedite the receipt of IRA proceeds.
IRA Collection and 401(k) Bequests to Charity
Problem: The IRA custodian claims that the charity must set up a new account.
Response: The charity is not an individual and therefore not qualified to set up an IRA account. Under Reg. 1.408-2(b), an IRA account must be for "the exclusive benefit of an individual or his beneficiaries." A charity is a corporation and defined as a "person" under the IRC, but a nonprofit corporation is clearly not an individual. Therefore, the charity is not qualified to set up an account. The appropriate response for the custodian is to transfer the designated amount directly to the charity.
Problem: The custodian attempts to apply the Patriot Act or FINRA Rule 2090 (Know Your Customer) to the charity. Some IRA custodians ask for detailed personal and financial information of nonprofit board members.
Response: The USA Patriot Act was passed in 2001 for the purpose of protecting America and reducing the risk that funds would be transferred overseas. Sec. 326 of the Patriot Act provides that "financial institutions" shall be required to exercise efforts to reduce the risk of funds being used by suspected terrorists or terrorist organizations. Patriot Act Sec. 326 applies if an individual or corporation attempts to open a bank account. The bank must maintain records to verify the person's identity, name, address and other identifying information and ascertain whether or not the person is on the list of known or suspected terrorists.
The Patriot Act and FINRA Rule 2090 (Know Your Customer) do not apply to U.S. nonprofits if they are not creating a bank or IRA account. See Patriot Act Sec. 326. In addition, our U.S. nonprofit is not on the known or suspected terrorist list. Therefore, there is no application of the Patriot Act or FINRA Rule 2090 to the distribution of an IRA balance to a U.S. nonprofit that is not setting up a bank or IRA account.
Problem: The IRA custodian may withhold 10% of the distribution and send it to the IRS.
Response: U.S. nonprofits are tax exempt. While there is generally a requirement to withhold tax on IRA distributions to individuals, it is possible to elect no tax withholding on IRS Form W-4P. In any case, a qualified exempt charity is not subject to income tax and there is no requirement for withholding.
Letter to General Counsel to Facilitate IRA Collection
Some IRA custodians will promptly distribute the funds to a nonprofit, but others may delay or create roadblocks to that distribution. In order for a nonprofit to collect its share of an IRA, it may be necessary to send a letter to the general counsel of the bank or other financial custodian. Below are two specimen letters that nonprofits may modify and send to the general counsel of the IRA custodian. The first letter is sent to IRA custodians who require the nonprofit to create an inherited IRA account. However, some enlightened IRA custodians do not require the nonprofit to set up an inherited IRA account and the second letter may be used. Nonprofits are granted permission to use these letters with the nonprofit's name, address and specific goals. The donor's name and account number must also be updated.
Specimen Letter if IRA Custodian Requires Nonprofit IRA Account
January 1, 2019
Mr. or Ms. General Counsel
IRA Custodian
1234 Michigan Avenue
Chicago, IL 00000
Dear General Counsel:
We have been informed that Favorite Charity is a beneficiary of the IRA of Jane Doe. The IRA account number is 123-45-678. We request that you liquidate the IRA funds held for our benefit and send a check to us within 30 days at our address: Favorite Charity, Bequest Administrator, 123 Oak Street, Chicago, IL 00000.
Favorite Charity is not required to open an IRA account with a custodian to receive an IRA distribution. Under Reg. 1.408-2(b), an IRA account must be created "for the exclusive benefit of an individual or his beneficiaries." A charity is a nonprofit corporation defined as a "Person" under the IRC, but a charity clearly is not an individual and therefore not permitted to set up a Sec. 408 IRA account. In addition, as custodian you are trustee of an IRA trust under Reg. 1.408-2(b). You are required by federal and state law to comply with the fiduciary responsibilities of a trustee. If you fail to make the distribution as required in your contract with the IRA owner, you are potentially in breach of your duty of fiduciary responsibility.
Favorite Charity is not subject to the USA Patriot Act (Pub. L. 107-56) or FINRA Rule 2090. Sec. 326 of the USA Patriot Act requires banks and other custodians to determine that a person opening an account is not on the suspected terrorist list. First, IRC Sec. 408 does not permit a nonprofit to open an IRA account. Because the charity cannot open an IRA account, both the Patriot Act and FINRA Rule 2090 do not apply to an IRA distribution to charity. In addition, we are a U.S. recognized exempt charity and not on a suspected terrorist list.
Finally, IRA custodians may withhold 10% of a distribution to individuals and remit that amount to the Internal Revenue Service. We are tax exempt and elect under IRS Form W-4P to not have tax withheld. Because we are tax exempt, there is no requirement for withholding on your part. Enclosed is a copy of our IRS tax exemption letter. Our IRS identification number usable on Form 1099-R is 00-1234567. There is no IRS requirement to have an IRA account for you to issue Form 1099-R
Because we are not permitted to open an IRA account, the USA Patriot Act and FINRA Rule 2090 do not apply to a U.S. charity not opening an IRA account and withholding is not required, we request that you remit within 30 days the full distribution to the above address. If you are unable to distribute our vested IRA funds within 30 days, then, in a manner similar to Sec. 6662(a), we should receive the IRA funds and a 20% penalty amount. Because after the 30-day period you are in breach of contract and breach of trustee fiduciary responsibility due to noncompliance with terms of the IRA agreement, we will be willing to settle for the IRA funds plus a 20% penalty.
If you feel you are unable to make this prompt distribution as requested, please have your Legal or Compliance Department provide a written explanation of your legal basis for not distributing these IRA funds to us. Reminder -- this is a trust. You are subject to a breach of fiduciary responsibility claim for failure to follow trust terms.
Sincerely,
Susan Officer
Vice President, Favorite Charity
Specimen Letter if IRA Custodian Does Not Require Nonprofit IRA Account
January 1, 2019
Favorite Charity
123 Oak Street
Chicago, IL 00000
Dear General Counsel:
We have been informed that Favorite Charity is a beneficiary of the IRA of Jane Doe. Your financial institution serves as the IRA custodian. Under Reg. 1.408-2(b), an IRA account must be created "for the exclusive benefit of an individual or his beneficiaries." A charity is a nonprofit corporation and is defined as a "Person" under the IRC, but a charity clearly is not an individual and therefore not permitted to set up a Sec. 408 IRA account. Therefore, we appreciate your organization's decision that our charitable organization will receive our share of the deceased's IRA without the need to open an Inherited IRA.
The IRA account number is 123-45-678. We request that you liquidate the funds held for our benefit in the trust account and deliver them by check within 30 days to our organization at this address: Favorite Charity, Bequest Administrator, 123 Oak Street, Chicago, IL 00000.
While IRA custodians often withhold tax on a distribution to individuals, as a nonprofit we are tax exempt and elect under IRS Form W-4P to not have tax withheld. Because we are tax exempt, there is no income tax on our IRA distribution and no requirement for withholding on your part. Enclosed is a copy of our IRS tax exemption letter. Our IRS identification number is 00-1234567. If you are not able to issue a computer-generated IRS Form 1099, we will accept one that is a manually produced. If we are a partial beneficiary of the IRA, we waive and release all rights to divided future interests or odd shares earned after the date of death and request prompt distribution of our IRA proceeds prior to completion of actions by other beneficiaries.
If you feel you are unable to make this prompt distribution as requested, please have your Legal or Compliance Department provide us with your legal basis for holding these funds and not distributing them to us. We remind you that this is a trust and you are potentially subject to a breach of fiduciary responsibility claim if you do not comply with the terms of the IRA agreement.
Sincerely,
Susan Officer
Vice President, Favorite Charity
Iowa attorney Johni Hays and Michael Kenyon, President of the National Association of Charitable Gift Planners, are collaborating and at a future date will publish a list of the "enlightened" IRA custodians on www.charitablegiftplanners.org.
Expected Response to General Counsel Letter
This letter has two keys that encourage IRA distributions. The 30-day limit and the 20% penalty will cause the letter to be sent to the IRA custodian general counsel. Legal counsel will recognize that he or she does not wish to create a claim for breach of fiduciary responsibility. The general counsel can negotiate with the nonprofit to drop its claim for breach of trustee fiduciary responsibility and the 20% penalty in exchange for the IRA distribution. This letter should move the IRA custodian forward and encourage a prompt distribution.
The bold words on the letter should be replaced by the nonprofit name, address and other information. The letter may be modified in the case of a Sec. 401(k), 403(b) or other type of qualified retirement account. Even with this collection letter, it may take a period of time for the custodian to respond.
IRA Transformative Gifts
With potential IRA and 401(k) bequests over $166 billion, all nonprofits should encourage lifetime and testamentary IRA gifts with a full-featured marketing program. Your Boomer and Quiet Generation donors can transform your organization through these IRA gifts. With the assistance of the IRA collection letter above, your nonprofit will quickly benefit from these excellent gifts.
IRA Loans to Charity
A recent study found that there is an estimated $27 trillion in retirement assets held by Americans. Millions of IRA owners are also charitable donors and may be interested in a plan to benefit charity while still receiving life income from an IRA.
A potential "benefit to charity with life income" strategy was described in PLR 200741016. It involves a loan from an IRA to a charitable organization with the interest payments used to fund the IRA required minimum distributions. This option exists with self-directed IRAs and custodians who are willing to participate in the transaction.
IRA Loan In PLR 200741016
In PLR 200741016 an IRA owner desired to make a 20 year term loan with annual 5% interest payments to church B. The self-directed IRA custodian was willing to transfer funds to Church B in exchange for both the 20 year/5% note and a collateral assignment on an insurance policy.
Church B planned to use a portion of the funds to acquire a life insurance policy on the life of IRA owner. Church B will have full ownership and control of the policy and will be the beneficiary. As part of the agreement for the loan, Church B will complete both the 20 year/5% promissory note and provide the IRA custodian a collateral assignment of the proceeds to the life insurance policy.
At the end of 20 years or the earlier demise of the donor (and maturity of the life insurance policy), Church B will repay the loan principal amount to the IRA custodian. IRA owner plans to take required minimum distributions (RMDs) from the IRA during his lifetime. Loan interest payments will provide funds for the RMDs.
The IRA owner requested a ruling that the loan was not a prohibited transaction and that the IRA did not make a prohibited investment in the life insurance policy.
Sec. 408(a)(3) prohibits an IRA from investing in life insurance. Sec. 408(e)(2)(A) indicates that an IRA owner may not participate in a prohibited transaction such as a Sec. 4975(c)(1)(B) loan of money to a disqualified person.
Because Church B is not a disqualified person, the IRS determined that the loan to Church B is permissible. Second, because Church B is the owner of the policy with full rights of ownership and is the policy beneficiary, the IRA does not own a prohibited life insurance investment. While a PLR is not a precedent and applies only to that taxpayer, the ruling suggests that an IRA loan and insurance plan may be permissible.
IRA Loan Strategies
There is more than one option or strategy that could be involved with a loan from an IRA. These are a loan to the charity with a bequest of the note, a plan similar to PLR 200741016 in which the charity uses the funds to acquire a life insurance policy on the IRA owner and an option in which the donor not only loans the funds to the charity but also makes a QCD of the required minimum distributions.
I. IRA Loan Plus Bequest
An IRA owner may make a loan to a public nonprofit. Under Sec. 4975(c)(1)(B), a loan to a disqualified person is prohibited. Sec. 4975(e)(2) lists the disqualified individuals. Among those parties would be a fiduciary, an employer, an employer organization, an owner of 50% or more of the equity or beneficial interests in an entity or a member of the family or controlled business entity. The nonprofit organization is not listed. The public nonprofit organization is not a member of the prohibited list and therefore a loan is permissible.
However, there is a basic requirement that loans pay a fair rate of return. Each month the IRS publishes a revenue ruling that lists the applicable federal rate for loans. Typically, a loan from an IRA to a nonprofit will be a long-term loan with annual payments. Therefore, the applicable federal rate for annual payment long-term duration loans should be the interest payment on the IRA loan.
Example 4.6.3C IRA Loan For Capital Building Campaign
Assume that IRA owner is a supporter of Favorite Charity. Favorite Charity needs $1 million to complete the capital building campaign and construct a new facility. IRA owner has $2 million in her IRA and lends $1 million to Favorite Charity on a 40 year note with interest-only payments of 5%. Favorite Charity has substantial assets and endowment. Therefore, the unsecured note is deemed to be a prudent investment for the IRA.
Upon receipt of the $1 million, Favorite Charity completes the capital campaign and builds the new facility. Each year, Favorite Charity makes an annual payment of $50,000, (the 5% interest) to the custodian for IRA owner. These funds are used as part of the IRA required minimum distribution. Because IRA owner desires to support Favorite Charity, she designates Favorite Charity as the primary beneficiary of $1 million of her IRA. When IRA owner passes away, the $1 million note will be returned to Favorite Charity.
Because IRA owner is age 75, it is unlikely that she will survive to age 115. However, if IRA owner were to survive for the 40 year duration, Favorite Charity would then need to make the $1 million payment back to the custodian of IRA owner at that time.
II. IRA Loan Plus Insurance Policy
In a manner similar to PLR 200741016 the IRA owner could combine a loan with a purchase of insurance by the nonprofit.
Once again, the loan from the custodian of IRA owner to Favorite Charity is permissible, so long as the loan bears an appropriate interest rate. IRA owner contemplates creating a 30 year interest-only loan with a 5% rate and annual payments. IRA owner divides her $2 million IRA into $1 million that she will retain and $1 million that will be loaned to Favorite Charity. The treasurer of Favorite Charity signs the $1 million promissory note, with a term of 30 years and 5% annual interest payments.
Because Favorite Charity is permitted to invest the funds as desired, Favorite Charity then acquires a life insurance policy on IRA owner. IRA owner is a regular donor to Favorite Charity and under state law Favorite Charity does have an insurable interest in IRA owner. Because Favorite Charity has ownership of the insurance policy, full control with respect to the policy and is the beneficiary, the IRA is not making a prohibited life insurance investment under Sec. 408(a)(3).
When IRA owner passes away, Favorite Charity receives the proceeds of the insurance policy and makes the repayment of the note to the IRA. The IRA owner could either leave the IRA to family members or transfer the IRA balance at death to Favorite Charity.
If the IRA owner leaves the IRA to family members, then he has enabled the charity to benefit from any excess earnings on the fund during his lifetime. If the IRA owner also leaves a bequest of the fund to the charity, then the charity receives both the benefit of excess earnings during life and the principal from the IRA when the owner passes away.
One concern about the plan is the potential for unrelated business taxable income. In Mose and Garrison Siskin Memorial Foundation, Inc., v. United States, 790 F.2d 480 (6th Cir. 1986), the charity owned 800 insurance policies and desired to increase total return. Policy loans at 5.5% interest were withdrawn and invested at approximately 10%, producing an annual profit of 4.5%. The court determined that because the loans were "acquisition indebtedness" under Sec. 514(c), that profit was unrelated business taxable income.
Similarly, because the loan from the IRA owner to the charity may be invested and produce income, there is a potential for Sec. 514(c) unrelated business taxable income on the debt-produced revenue. If all of the payments from the owner are invested in the insurance policy, it is possible that the exception on death benefits proceeds of life insurance would eliminate the unrelated business taxable income issue. However, if there are any other earnings or capital gains during the life of the owner that can be traced to the investment of IRA loan proceeds, then acquisition indebtedness and unrelated business taxable income would apply.
III. IRA Loan Plus a QCD of the RMD
The IRA owner could also couple the IRA loan to charity with a QCD of the RMD amount. This option would again require a fair rate of return for the IRA loan and just as the above examples, the annual repayments would be used as part of the IRA owner's RMDs.
This strategy may be used in the case a donor wishes to avoid additional taxable income that would come with receiving their RMDs or do not need the income from their RMDs. If the Sec. 406 option to give up to $100,000 in a QCD (indexed for inflation in 2024) is applicable for a given year, the IRA owner could transfer the RMD amount directly to charity through a QCD. Not only would this reduce his adjusted gross income for the year, but it will also count towards all or part of their RMD amount.
Creative IRA Loan Planning
The opportunity for an IRA owner to make a reasonable interest loan to a nonprofit opens up several new creative planning strategies. For IRA owners with substantial balances who desire to benefit charities now instead of waiting to transfer the balance at their demise, the loan strategies may be very attractive.
The IRA charitable loan with a revocable beneficiary designation to Favorite Charity is reasonably straight-forward. In the vast majority of cases, it will result in an immediate transfer of benefits to charity.
For the more sophisticated and creative donor, the IRA loan with the charity purchasing a life insurance policy may also be a desired option. It should be emphasized that this option potentially may subject the charity to unrelated business income tax on any net income from the loan.
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Case Studies on IRA Bequests/Loans to Charity
Changing IRA Beneficiaries Now, Before or After:
Richard Stevenson, 74, is a university professor and ex-Marine. After serving two tours, he returned to the States and began his lifelong dream of becoming a teacher. He received his bachelor's from a local college and his master's and doctorate from a State University. Soon thereafter, he was offered a history teaching position with the University, which he gratefully took. Amazingly, he taught full time at the University for almost 40 years. During that time, he was named Professor of the Year five times! He now works on a part-time basis, staying active with the university and its students. Richard married his high school sweetheart, Sue. Sue and Richard have been married for almost 50 years and have two children, Richard, Jr., and Linda.
An Option for Stock Options:
Patricia Weldon is Vice President of operations for a major manufacturing company. She is 55 years old, single and has now been with the company over 25 years. As part of her compensation package, two years ago she was granted an option to purchase 5,000 shares of company stock at a per-share price of $20. The stock is now trading on the New York Stock Exchange at $50 per share.
IRD Assets Make a Better Bequest:
James Johnson passed away two years ago and in his Will he had made various pre-residuary property bequests. He had also left the estate's residue in various percentages to a number of tax-exempt charities. In total, 25% of the residuary is to be transferred to charities. This 25% represents approximately $500,000 of the $2,000,000 estate. The Will gave the executor, Jeffrey Nelson, the power to sell any assets or to distribute assets in kind. Among the assets in the decedent's residuary estate were Series E Bonds that had accrued reportable income. James had not elected under Code Sec. 454(a) to report the bond interest annually and, therefore, the accrued interest on the bonds is income in respect of a decedent (IRD). Generally, the interest is treated as includable in the decedent's estate and is taxable to the decedent, the estate or estate beneficiaries. However, since neither James nor his estate elected to report the increase in the bonds' redemption price each year as it accrued (nor did the estate intend to do so), the beneficiaries of the estate would be required to report the accrued interest when the bonds are redeemed.
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Private Letter Rulings
PLR
200002011 Unqualified Deferred Comp and Options Bequeathed to Charity:
Taxpayer has accrued a right to three different types of unqualified deferred compensation. He has compensation that has been payable but has been deferred, non-statutory stock options that he may exercise and a right of his estate to receive an additional amount of nonqualified deferred compensation.
PLR
200012076 Bequest of Nonqualified Options IRD to Charity:
Senior officers of technology companies and other corporations frequently receive stock options as part of their compensation. The taxpayer in this ruling is the retired chairman of Company X and holds vested nonqualified stock options that will expire in 15 years.
PLR
200126036 IRA Beneficiary Designation Was Not Timely or Properly Made:
Taxpayer was executor of her mother's estate, which consisted of five IRA accounts. Unfortunately, Taxpayer's mother did not name a designated beneficiary on any of her IRA accounts. Not wishing the negative implications inherent in this situation, Taxpayer, as executor of her mother's estate, established another IRA account in her mother's name and attempted to roll over the five IRA accounts into the newly created IRA account. In addition, Taxpayer named herself as the designated beneficiary of the newly created IRA account.
PLR
200520004 IRD Assignment to Charity Allowed:
Decedent was the owner of multiple IRAs and a 401(k) account (all of which are considered IRD). On his date of death, his estate was the designated beneficiary of all of the IRA accounts. The decedent did not have a designated beneficiary for his 401(k). Decedent's will named ABC charity as the residuary beneficiary of his estate. The estate executor wishes to assign the IRAs and the 401(k) account to the charity in partial satisfaction of the charity's residual share of the estate. Decedent's will allows the executor to make distributions in cash or in kind without having to make pro rata property distributions. The Service held that because of the powers held by the executor, the IRD income would be taxable to the charity rather than on the estate's income tax return.
PLR
200633009 Assignment of Decedent's IRA to Charity Won't Be Deemed Transfer:
D passed away naming his estate the beneficiary of his IRA. D's will named charity C the residuary beneficiary. The will gave the executor of the estate power to "make distributions in cash, in kind or partly in each, either pro-rata-or otherwise."
PLR
200652028 Transfer of IRA Not Taxable to Estate:
A, who died on D1, was grantor during life of a revocable living trust (Trust). A was the owner of three IRAs. Trust was designated as the beneficiary of the IRAs. Trust provides that on death of A, all of the Trust assets shall be distributed, and that Charity 1 and Charity 2 shall each receive a portion of the residue of Trust.
PLR
200741016 IRA Loan To Charity Permitted:
IRA owner desires to make a 20 year term loan with annual 5% interest payments to church B. The self-directed IRA custodian is willing to transfer funds to church B in exchange for both the 20 year/5% note and a collateral assignment on an insurance policy.
PLR
200803002 Commercial Annuity Allocated Tax-free to Charity:
X created Trust to distribute Trust assets upon X's death with Charities receiving a portion each of the residue. X also owned a non-qualified deferred annuity contract (Annuity) and designated Trust as the beneficiary.
PLR
200826028 Assignment of IRA Not a Transfer:
Decedent's will provides that the residue of his probate estate is added to a trust he created during life. The terms of the trust state that upon Decedent's death distributions are to be made to specified beneficiaries with the residue passing to four charitable organizations.
PLR
200845029 Pension Plan Assignment to Charity Excluded From Gross Income:
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.
PLR
200848020 IRA Charitable Transfer - No Sec. 642(c) Deduction:
In ILM 200848020 (28 Jul 2008), the Service denied an income tax deduction under Sec. 642(c) for a distribution to charity from an IRA testamentary trust.
PLR
200850004 Creative IRA Transfer to Charities:
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.
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