Private Letter Rulings - IRD Assignment to Charity Allowed
GiftLaw Note:
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.
Editor's Note: If a client plans to leave a bequest to charity and he or she owns IRD assets, it is best to gift the IRD assets to the charity and give the assets that will receive a step up in basis to the family. When a charity receives the IRD assets, it will not have to pay any income tax. If the IRD assets are instead transferred to family, they will pay income taxes on the IRD assets. The most common types of IRD are any retirement assets (i.e., 401(k)s, 403(b)s, IRAs), commercial annuities and U.S. Savings Bonds. The best way to transfer an IRD asset is to use the beneficiary designation form. If the IRD is payable to the estate, as it was in this PLR, the estate may have to include the IRD on the estate income tax return. What saved the estate from having to report the IRD as income in this case was the fact that the executor had the authority to make non-pro rata distributions of property to charity. If the will or the state law does not allow for non-pro rata distributions, the IRD will be reported on the estate income tax return. Further, the estate income tax return is not allowed an offsetting charitable deduction because the charitable gift is deemed to come from corpus rather than income. To avoid this potential problem, the will or living trust should state that charitable bequests should be funded where possible with property that constitutes IRD as defined in the Internal Revenue Code. Or, an even better solution is to remove the IRD estate income tax problem by using the beneficiary designation form. If the charity is listed as the IRD beneficiary on the beneficiary designation form, the IRD will be transferred to the charity without passing through the estate.
Editor's Note: If a client plans to leave a bequest to charity and he or she owns IRD assets, it is best to gift the IRD assets to the charity and give the assets that will receive a step up in basis to the family. When a charity receives the IRD assets, it will not have to pay any income tax. If the IRD assets are instead transferred to family, they will pay income taxes on the IRD assets. The most common types of IRD are any retirement assets (i.e., 401(k)s, 403(b)s, IRAs), commercial annuities and U.S. Savings Bonds. The best way to transfer an IRD asset is to use the beneficiary designation form. If the IRD is payable to the estate, as it was in this PLR, the estate may have to include the IRD on the estate income tax return. What saved the estate from having to report the IRD as income in this case was the fact that the executor had the authority to make non-pro rata distributions of property to charity. If the will or the state law does not allow for non-pro rata distributions, the IRD will be reported on the estate income tax return. Further, the estate income tax return is not allowed an offsetting charitable deduction because the charitable gift is deemed to come from corpus rather than income. To avoid this potential problem, the will or living trust should state that charitable bequests should be funded where possible with property that constitutes IRD as defined in the Internal Revenue Code. Or, an even better solution is to remove the IRD estate income tax problem by using the beneficiary designation form. If the charity is listed as the IRD beneficiary on the beneficiary designation form, the IRD will be transferred to the charity without passing through the estate.
The information submitted states that Decedent died on D1, owning certain individual retirement accounts (the IRAs), each represented as meeting the requirements of Section 408. Decedent's Estate is the named beneficiary of the IRAs. Additionally, Decedent was the named beneficiary of a Section 401(k) plan (Plan). Decedent had not designated a beneficiary of Plan as of D1, so that the amounts in Plan will be payable to Decedent's Estate.
Decedent's will names the Charity as a residuary beneficiary. The executor of the Estate proposes to assign the IRAs and Plan to the Charity in partial satisfaction of the Charity's share of the residue. Decedent's will provides that the executor is authorized to make distributions in cash, in kind valued at fair market value of the property at the date of distribution, or partly in each, without being required to make pro rata distributions of such 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 Section 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 Section 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 Section 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 Section 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 assignment of the IRAs and Plan to the Charity in satisfaction of its shares of the residue of the Estate will not be a transfer within the meaning of Section 691(a)(2). Only Charity will include the amounts in the IRAs and Plan in its gross income when the distribution or distributions from the IRA or Plan are received by the Charity.
Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to the executor of Estate.
Sincerely,
J. Thomas Hines
Chief, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)