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VOL. CLXXXIX NO.1 INDEX 46 JULY 2, 2007 ESTABLISHED 1878

This article is reprinted with permission from the JULY 2, 2007 issue of the New Jersey Law Journal. 2007 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

WealthManagement

By Michael P. Spiro

Most are aware that charitable

bequests are a good way forcharitably minded individu-

als to benefit a cause or insti-tution while avoiding federal

and New Jersey estate taxes. In structur-ing charitable bequests, however, careshould be taken to ensure that a testator

is taking full advantage of all of the taxincentives available, including income

tax advantages.

Many individuals have accumulat-ed a substantial portion of their wealthin tax-deferred Individual RetirementAccounts (IRAs) or qualified plans

(together referred to as retirementaccounts). Using a retirement account

as the source of a post-mortem charita-ble gift will not only provide estate tax

savings, it will also provide substantialincome tax savings.

When a retirement account is left tononcharitable beneficiaries, either by

beneficiary designation or through anestate, the retirement account will beincluded in the taxable estate of the

decedent for estate tax purposes, andpayments from the retirement account

to the estate or its beneficiaries will besubject to federal income tax as income

in respect of a decedent (with a deduc-tion for estate taxes paid). Thus, if aretirement account is removed from the

estate via transfer to a charitable institu-tion, both income tax and estate tax will

be saved.

The use of a retirement account tomake a post-mortem charitable gift canbe accomplished in two different man-ners. The first is to name the estate of

the participant as the designated benefi-ciary of the retirement account, and to

use the retirement account to satisfy a

charitable bequest in the testators willThe second is to name the charitableinstitution as the designated beneficiary

of all, or some part, of the retirementaccount. While both means of making

charitable gifts will effectively saveboth estate and income tax, various factors should be considered in determin-

ing how best to structure the charitablebeneficiary designation.

Ultimately, the best form of beneficiary designation will depend on the

assets of the retirement account, theirvolatility, and their proportionate relationship to the total estate of the testator

If, for example, the testator wishes tomake a residuary gift to the charity, giv-

ing the charity a fixed percentage of histotal estate, and the retirement accoun

constitutes a significant portion of thedecedents total estate, the most flexibil-ity is achieved by making the estate the

designated beneficiary of the retirementaccount. If the charity were to be named

as the beneficiary, and the probate

assets of the decedent were to decreasesignificantly in value, the heirs of thedecedent could be left with a muchsmaller share of the decedents assets

than intended.By contrast, if the estate is made the

beneficiary, the bequest to the charitycan be made as a residuary bequest, and

the decedent can be assured that thecharity will only receive the desired

Transferring a retirement account

to a charitable institution saves

income and estate tax

Retirement Accounts for Post-Mortem Charitable Giving

Spiro, an attorney at Flaster/Greenberg of Cherry Hill, is a member of the taxation,

corporate and estate planning practice groups. He focuses his practice on providing

advice in the areas of tax and business planning.

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2 NEW JERSEY LAW JOURNAL, JULY 2, 2007 189 N.J.L.J.46

portion of his estate. Numerous private

letter rulings have established that theInternal Revenue Service generally

allows an executor to elect to use aretirement plan, or a portion of a retire-ment plan, to satisfy a residuary bequest

to charity. See Ltr. Rul. 200234019; Ltr.Rul. 200520004. Likewise, no income

tax will be recognized by the estate as aresult of the transfer of the Retirement

Account. Treas. Reg. 1.691(a)-4(b)(2).If, on the other hand, the testator

intends to make a pecuniary bequest to

the charity (that is, a bequest of a fixeddollar amount), the bequest may be bet-

ter structured by designating the charityas the beneficiary of the retirement

account to the extent of the pecuniarybequest amount, and naming an individ-

ual as the designated beneficiary of theremaining assets of the retirementaccount. This allows any individual ben-

eficiary of the retirement plan to takeadvantage of the gradual payout permit-

ted by Section 401(a)(9) of the InternalRevenue Code for individual beneficia-ries of retirement accounts, thus defer-

ring the income tax on the amountspayable to the noncharitable beneficiary.

Moreover, the risk of unintentionallydivesting the heirs of the testator is not a

factor, as the testator has indicated a spe-

cific amount that he wishes to bequeathto the charity.

A beneficiary designation consti-tutes a superior method of making apecuniary bequest to charity because it

allows the deferral of income by theindividual beneficiaries of any retire-

ment plan assets in excess of the charita-ble bequest. Neither an estate nor a char-

itable organization may be a designatedbeneficiary for purposes of CodeSection 401(a)(9). Though both may be

beneficiaries, Code Section 401(a)(9)subjects both the estate of the participant

and/or a charitable organization to accel-erated payouts of the Retirement Plan.

Treas. Reg. 1.401(a)(9)-4. If the testa-tors estate or a charity is the beneficiary

of the retirement plan, and the testatordies prior to the required beginning datefor distributions from the retirement plan

to begin (the RBD), the entire retirementplan must be distributed over five years.

Treas. Reg. 1.401(a)(9)-3 Q&A 4. If thetestator dies after the RBD, the entireaccount balance must be distributed over

the decedents remaining actuarial lifeexpectancy. Treas. Reg. 1.401(a)(9)-5

Q&A 5. To the extent that the retirementplan is distributed to a charity (or to a

charity through the estate as described

above), this does not matter, as the tim-ing of income is irrelevant for a tax-

exempt entity.To the extent, however, that the

Retirement Account is distributed to an

individual beneficiary of the estate, it ispreferable for such beneficiary to be a

designated beneficiary of the retirementplan, as a designated beneficiary is enti-

tled to take distributions from the retire-ment plan over the beneficiarys remain-ing life expectancy. Treas. Reg

1.401(a)(9)-5 Q&A 5. Designated bene-ficiaries may also roll over retirement

plan assets to their own IRAs (either in aspousal rollover or through a nonspousal

rollover, which is permitted by newCode Section 402(c)(11)).

Thus, if the testator is intent on leav-ing a specific sum to charity regardlessof the effects of the gift on the share of

his estate distributable to other benefi-ciaries, such a bequest may be best made

in the beneficiary designation of the tes-tators retirement plan. In all events, instructuring post-mortem charitable gifts

of retirement accounts, attention must bepaid to the testators specific desires as

well as the make-up of the testators totalestate. I