Life and Beyond: Gifts of Retirement Plan Assets

Life and Beyond:

Gifts of Retirement Plan Assets

Timothy Prosser, Relationship Manager September 3, 2020 1

Today’s Discussion

Gift Planning Considerations – Tax treatment of distributions – Mechanics of charitable gifts – Choosing the right plan

Case Studies Addressing Donor Objectives with Life Income Gifts

Importance of Retirement Plan Assets

as a Source of Charitable Gifts

Background: Funds Held in Retirement Accounts

US Total Retirement Market Assets

4

Background: Plan Statistics

Assets by Plan Type—Q3 2019

IRA assets = 33% of U.S. retirement assets as of Q3 2019

Plan Type Trillions of Dollars

Annuities 2.2

Government Pension Plans 6.4

Private Defined Benefit 3.3

Defined Contribution 8.5

IRA 9.8

Total 30.1

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EGTRRA Increases in Plan Funding Limits

Traditional IRAs

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EGTRRA Increases in Plan Funding Limits

IRA Catch-up Provisions

 Available to taxpayers aged 50 and older

 Accumulate greater amounts for retirement at an

accelerated schedule

 Contribute catch-up amounts in addition to the regular

IRA contribution limits

– $1,000 (tax years 2006 and thereafter)

EGTRRA Increases in Plan Funding Limits

401(k), 403(b), and 457 Plan Limits

$8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000

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EGTRRA Increases in Plan Funding Limits

401(k), 403(b), and 457 Catch-Up Limits

2002………$1,000 2003………$2,000 2004 ………...$3,000 2005 ………...$4,000

2006 & thereafter…$5,000 indexed ($6,500 for 2020)

Available to taxpayers aged 50 and older

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Required Minimum Distribution Rules

IRS regulations under Code §401(a)(9) for distributions from a retirement plan*

 Account owner’s minimum distributions calculated under

Uniform Table

 Charitable gifts of retirement assets at death made easier

*SECURE Act (December 2019) delays account owner’s RBD to age 72, but lessens individual beneficiaries’ ability to “stretch out” distributions

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IRS Uniform Table Used to Calculate Lifetime

Required Minimum Distributions

IRS Publication 590, Appendix C, Table III

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Maria: Required Minimum Distribution Example

She has $500,000 in her IRA as of December 31, 2018 She will turn 80 years old in 2019 Her Required Minimum Distribution

during 2019 is her IRA Account Balance/ Applicable Distribution Period

$500,000 ÷ 18.7 = $26,738

Designated beneficiary does not affect owner’s required

minimum distributions

Gift Planning Considerations

With Retirement Plan Assets

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Taxes on Retirement Plan Assets

 Lifetime withdrawals of retirement plan assets are taxed as ordinary

income. Withdrawals before age 59 ½ are generally also subject to a 10% penalty tax

 Distributions at death are considered “Income in Respect of a

Decedent” (IRD)

– IRD is taxable income to which the decedent was entitled at death but which was not included in any previous income tax return

– IRD is subject to double taxation:

(1) included in the decedent’s taxable estate

(2) subject to income tax in the hands of the recipient

Charitable Gifts Can Provide Tax Solutions

Income tax charitable deduction offsets tax on lifetime withdrawal

– Itemizers only

– AGI limits

Testamentary charitable gift is solution to double taxation of IRD

– Estate tax charitable

deduction is unlimited

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Tax Benefits of Retirement Asset Gift to Charity at Death

*_{IRC §691(c) allows an income tax deduction for estate taxes paid on IRD assets.}

Distribution to Family Distribution to Charity

Retirement Plan

Asset Value

$1,000,000

$1,000,000

Income Taxes @ 35%

($350,000)

0

Federal Estate Taxes

@ 40%

($400,000)

0

Savings from §691(c)

Deduction

$140,000

N/A

Net Gift

$390,000

$1,000,000

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Inter Vivos Gift is a Two-Step Process

Note: QCD legislation allows limited tax-free, direct transfer from IRA to charity

Withdraw assets from plan account

– Causes recognition

of taxable income

– Increases AGI

Deliver cash to charity

2 1

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Qualified Charitable Distributions

 Made permanent under 2016 year-end legislation

 Traditional IRA or Roth IRA accounts, only

 $100,000 annual limit per taxpayer

 Age 70 ½ or older on the date of transfer to charity

 Direct transfer from IRA account to public charity

– Not to DAF, SO or private foundation

 Must be “fully charitable” (no quid pro quo)

– Split-interest gifts (CGA or CRT) do not qualify

– Donor must obtain written acknowledgement from charity

 Can satisfy Required Minimum Distribution

Gift at Death is Made by Beneficiary Designation

 Non-probate transfer

 Charity can be primary or contingent beneficiary

 Charity can be sole beneficiary or partial beneficiary (fractional share or percentage of account)

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Plan-Specific Issues for Donors

Which plan should fund the gift? ERISA vs. Non-ERISA plan_{– Spousal Waiver}

– Creditor Protection

Plan document restrictions

– Lump sum, only? – Annuity, only?

Participant action

– Election to annuitize (guarantee period?)

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A Successful Planned Gift…

Forwards an important charitable initiative

Aligns with the donor’s objectives

Is funded with the best gift asset

Uses an

appropriate gift type

Meets donor expectations

Donors Have Multiple Objectives

Philanthropic

Financial Planning

Personal and Family

 Provide ongoing support

 Meet a campaign goal

 Create a legacy

 Pass assets to heirs

Life Income Gift Case Studies

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Case Study #1: Mary

Wishes to remember your organization in her estate plan Has serious health concerns Supports her mother with $500 each month and wants this support to continue

Principal asset

$100,000

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Case Study #1

Solution: Testamentary Gift Annuity

 Testamentary Gift Annuity

 CGA agreement now between Mary and charity:

– CGA to be funded from Mary’s IRA upon Mary’s death

– Annuity payments to Mary’s mother for life (if she survives Mary)

– Payments based on then-effective ACGA rates (5.8% at age 75)

 Primary Beneficiary = 100% charity

 An estate tax charitable deduction is available for remainder value of CGA

 Annuity payments to mother are ordinary income

See Private Letter Ruling 200230018

Case Study #2: Professor Jones

I intent to fund a charitable reminder trust at my death using part of my 403(b) accumulation, which is currently at $1 million

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Case Study #2

Additional Facts

 Professor Jones brings you the original trust

instrument from her safe deposit box. It was signed by her 10 years ago, and names your university as trustee.

 The trust names Professor Jones’ children

(now ages 39 and 41) as joint and survivor beneficiaries of a 9% unitrust.

 The document recites funding with $10.00

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Case Study #2

The Irrevocable Unfunded (or Nominally Funded) CRT

How it is supposed to work

 A CRT is drafted during the donor’s life

 Unfunded or nominally funded

 Account beneficiary designation names the CRT

 No administration until donor’s death

 Normal trust operations begin at donor’s death

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Case Study #2

The Irrevocable Unfunded (or Nominally Funded) CRT

+

 Trust is already set up, no delay at death

 Trust qualifies as CRT from inception

 Trustee is aware and ready to act

 Avoids probate

Case Study #2

The Irrevocable Unfunded (or Nominally Funded) CRT

‒

 A qualified CRT must be administered as a CRT from inception

 Must invest nominal funding and make nominal payments

 A taxpayer identification number (TIN) should be obtained assigned from

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Case Study #2

Better Solution – CRT under Will or Revocable Trust

How it works

 The donor creates a Will or revocable living trust that contains the CRT

provisions at death

 The beneficiary designation lists the trustee of the CRT described in the Will or living trust as the designated beneficiary

 At the donor’s death the CRT springs to life

 The IRA administrator funds the CRT account

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Case Study #2

Better Solution – CRT under Will or Revocable Trust

+

 Trust is already set up, no delay at death

 Trust terms are flexible enough to respond to

changed circumstances

 Trustee is aware and ready to act

 Can avoid probate with revocable trust

 Revocable trust not open to public inspection

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Case Study #3

Your loyal donor, Bill, age 72, recently received your mailing about IRA charitable rollover gifts

He emails you to say that he is very excited about the possibility of a QCD gift from his large IRA accumulation

Case Study #3

I plan to instruct my IRA custodian to transfer $100,000 directly to your

organization in exchange for a little income.

How do the benefits differ between a gift annuity and a charitable remainder trust?

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IRA to Gift Annuity “Rollover”

Approximating an IRA-to-Gift-Annuity Rollover by Combination of Withdrawals and Beneficiary Designation:

 IRA Owner Age 72 with $100,000 balance takes $4,900 annual

distributions for life (gives future MRD over $4,900 to charity)

 Charity named as designated beneficiary of IRA at death

– Donor’s taxable income can remain constant (like CGA), but flexibility to increase/ decrease distributions if financially necessary

– Estate tax charitable deduction for gift at death

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IRA to CRUT “Rollover”

Approximating an IRA-to-CRUT Rollover by Combination of Withdrawals and Beneficiary Designation:

 IRA Owner Age 72 with $100,000 balance takes 5% annual distributions

for life (after age 78, gives extra MRD to charity)

 Charity named as designated beneficiary of IRA at death

– Plan growth is tax-free, distributions are ordinary income to donor

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