Winter 2019 Archive

The beneficiary forms associated with life insurance, retirement accounts, certificates of deposit and other financial arrangements are often plain-vanilla, one-size-fits-all documents.  Advisors can assist clients who wish to name a trust as beneficiary or make a designation that goes beyond just the name of the person or organization.  For example, it’s possible to name charity to receive part or all of an IRA in exchange for a charitable gift annuity payable to a surviving spouse or others.  But special instructions would need to be included on a separate page attached to the beneficiary form.  The client should contact the account manager or customer service representative for the form to use as a starting point.

Clients sometimes wish to leave charity a particular dollar amount from their IRAs, but find that the beneficiary forms permit IRAs to be divided only by percentages or fractions.  One solution is to state that charity is to receive a certain percentage (25%, for example) “not to exceed $50,000” (or some other dollar amount likely to be less than the stated percentage).

It’s important to ensure that the company understands and consents to any special beneficiary language and that the charity agrees to any conditions or restrictions to be placed on the bequest.

The benefits of philanthropy aren’t limited to people of a “certain age.”  Although charitable deductions are larger for charitable remainder trusts and charitable gift annuities when the beneficiaries are older, there are situations where charitable gifts in trust are appropriate for younger individuals.

Retirement planning—Wage earners in the 35% and 37% tax brackets may be frustrated by their inability to shelter as much income in qualified retirement plans as they would like.  These clients can defer more income until their retirement years while claiming a partial deduction now, through the use of a net-income with make up charitable remainder unitrust [Reg. §.1664-3(a)(1)] or a deferred payment charitable gift annuity.

Family support—Some younger clients may be providing financial assistance to parents or grandparents.  In most cases, the funds come from after-tax dollars, so a client in the 35% tax bracket who sends $1,000 a month to a parent has to earn nearly $18,500 to pay the taxes and make the $12,000 gift.  Instead, the client could create a charitable remainder trust or fund a charitable gift annuity that pays the parent the $12,000 annually.  The client receives a charitable deduction for the value of charity’s interest, based on the parent’s age.

College expenses—For a child about to enter college, a parent can create a term-of-years charitable remainder trust that pays the child income during college and until the child is established in a career—ten years, for example.  A charitable deduction is available and the trust can be funded with appreciated securities for even greater tax savings.

Capital gains reductions—Even with capital gains rates at 15% for most taxpayers, younger clients may consider a charitable remainder trust a way to liquidate highly appreciated assets within a tax-exempt environment.  They can retain income for life and benefit from capital gains tax avoidance and income tax charitable deductions.

Charitable remainder trusts must provide that the annuity or unitrust amount is payable to or for the use of one or more named persons, at least one of which is not a charity [Code §664(d)].  “Person” is defined to include an individual, a trust, estate, partnership, association, company or corporation [Code §7701(a)(1)], although if the income beneficiary is other than an individual, the trust must be for a term of no more than 20 years [Reg. §§1.664-2(a)(5), 1.664-3(a)(5)].  There is an exception, however, where the remainder trust pays to another trust for the life of an individual who is incompetent.

This exception allows a remainder trust to pay to a special needs trust for the life of the income beneficiary.  The IRS has said that since the only function of the second trust is to receive and administer the payments from the charitable remainder trust, the payments are deemed to be received by the incompetent person [Rev. Rul. 2002-20].  This may be especially important for parents and grandparents who wish to provide for a family member while preserving the protection of a special needs trust.

The IRS has ruled that a charitable remainder trust can even include language providing that in the event the income beneficiary becomes incompetent, the trustee may pay the annuity or unitrust amount directly to the beneficiary, for the benefit of the beneficiary, or to the beneficiary’s guardian or conservator (Letter Ruling 7806091).

There are several options that allow spouses to provide for one another while also securing significant support for favorite charities.  For those estates subject to tax, these techniques can also avoid or reduce the amount due.

Qualified terminable interest property (QTIP) trust—The surviving spouse must be given all income, paid at least annually.  The entire value of the trust qualifies for the marital deduction in the estate of the first to die.  At the survivor’s death, the value is included in his or her gross estate.  However, if a charity is named to receive some or all of the assets at the survivor’s death, the charitable deduction can reduce any tax.

QTIP charitable remainder trust—Normally, a testamentary charitable remainder trust would not qualify for the estate tax marital deduction, since the surviving spouse is not entitled to all income for life, but rather just the stated trust percentage.  Code §2056(b)(8) provides for a hybrid trust that does qualify for the marital deduction and also the charitable deduction.  The surviving spouse must be the only noncharitable beneficiary [Code §2056(b)(8)(A)], so the trust cannot pay income to children following the death of the surviving spouse.

Life estate in home or farm—A bequest of a home or farm to charity, with a life estate reserved for the surviving spouse, can qualify for both the marital and charitable deductions.  The spouse must have the right not only to occupy the property, but also to rent the home or farm and receive the income for life [Reg. §20.2056(b)-7(h)].

Convert a charitable bequest into an income tax deduction—With so few estates subject to tax, thanks to a credit that shelters estates up to $11.4 million, a smarter move might be to leave the intended charitable bequest to the surviving spouse (or any reliable person).  The spouse can then make an inter vivos charitable gift that qualifies for an income tax charitable deduction.