Charitable IRAs
By Robert Keebler at Virchow Krause

EXECUTIVE SUMMARY

In PLR 200633009, which was obtained by our firm, the IRS ruled that the assignment of IRAs by an estate's personal representative to a charitable beneficiary in satisfaction of its share of residue of the estate would not be a transfer under IRC § 691(a)(2) and only the charitable beneficiary will include amounts of such IRAs in its gross income when received.

FACTS

Mr. Smith died in 2005, before his required beginning date. Prior to his death, Mr. Smith maintained several IRAs, which were payable to his estate as primary beneficiary.

Mr. Smith’s Will provided for a specific bequest to his daughter and the residue of the estate passed as follows:

•           X% to the a charitable beneficiary
•           Y% to a testamentary trust

Mr. Smith’s Will also provides that the personal representative is empowered to do all things necessary or convenient for the orderly administration of the estate, which specifically includes the power to make distributions in cash, in-kind or partly in each, either pro-rata or otherwise.
 
The personal representative of the estate proposed to assign, in-kind, some or all of the IRAs to the charitable beneficiary as satisfaction of the charitable bequest under the Will.

DISCUSSION

IRC § 691(a)(1) provides that the amount of all items of gross income in respect of a decedent 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:

(1) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent;

(2) 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

(3) 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.

IRC § 691(a)(2) states as follows:

If a right, described in paragraph (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. Emphasis added.

Reg. § 1.691(a)-4(b) provides that if the estate of a decedent or any person transmits the right to income in respect of a decedent 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. Emphasis added.

Furthermore, Reg. § 1.691(a)-4(b)(2) states that if the right to income in respect of a decedent 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. Emphasis added.

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 § 691(a)(1) that is includable in the gross income of the beneficiary for the tax year the distribution is received.

Treas. Reg. § 1.691(a)-2(b) Example 1, gives the following example:

The decedent was entitled at the date of his death to a large salary payment to be made in equal annual installments over five years. His estate, after collecting two installments, distributed the right to the remaining installments payments to the residuary legatee of the estate. The estate must include in its gross income the two installments received by it, and the legatee must include in his gross income each of the three installments received by him.

An very similar issue was addressed in PLR 200520004 (May 20, 2005). In this ruling, the decedent died owning IRAs and a qualified plan. The decedent's estate was the beneficiary of the IRAs and the plan. The decedent's will named a charitable organization as a residuary beneficiary. The executor of the estate proposed to assign the IRAs and plan to the charitable organization in partial satisfaction of the charity's share of the residue. The decedent's will, as did Mr. Smith’s, provided 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. In PLR 200520004, the Service ruled that the assignment of the IRAs and the plan by the estate's executor to the charitable beneficiary in satisfaction of its share of the residue of the estate wasn’t a transfer under IRC § 691(a)(2) and only the charitable beneficiary would include amounts of the IRAs and plan in its gross income when received.

In PLR 200633009, the charitable beneficiary is the ultimate distributee. The personal representative of Mr. Smith’s estate was to distribute some or all of the IRAs in-kind to the charitable beneficiary. Therefore, distributions from such IRAs should be taxable to the charitable beneficiary as the ultimate payee and not the estate. Similarly, the mere act of making in-kind distributions in satisfaction of the bequest did not cause the estate to recognize income. The estate did not receive any distributions from such portions of the IRAs that were assigned, but rather, distributions flowed directly to the charitable beneficiary. The IRS agreed that under the plain reading of IRC § 691(a), only the charitable beneficiaries would recognize income for the IRA distributions from such IRAs and only when such distributions are received.

CONCLUSION

When there are charitable bequests in an estate, it is generally better to fund such bequests with items of IRD, such as an IRA. By doing so, you are not reducing the non-charitable beneficiary’s share by the income tax liability that comes along with IRD items. Instead, the income tax resulting from a distribution will be the responsibility of the charitable beneficiary, which, of course, is exempt from such tax. If an IRA is payable to an estate or trust, you should always try to distribute the IRA “in-kind” to fulfill charitable bequests.

Back to ARTICLES.