How to tax Church inheriting IRA?
Revocable living trust, that qualifies is a pass through trust, receives IRA CD’s. Half go to church, half to 6 people. All will get funds ASAP – no stretch involved. Accountant says trust must pay income taxes [at dead owner’s rate] on IRA prior to payout to heirs and church. I think he is wrong. Can we not “pass through” the IRA money and send 1099’s to all and heirs pay own tax on inherited IRA money? The church therefore pays nothing. Correct? If so, accountant will want some IRS info to use as backup. Where can I find that info?
Permalink Submitted by Alan Spross on Wed, 2009-11-18 22:08
Perhaps the 1041 Inst. will help. The church has no tax liability, and the trust should get a charitable deduction for the amount of IRA distributions to the trust that are passed through to the church. The individual trust beneficiaries will get a K1 showing their share of the IRA proceeds. This all assumes that the trustee is required to pass all income through to the beneficiaries and not retain it in the trust. The only actual tax payments would be made by the individual benficiaries on their own tax returns.
Permalink Submitted by mk foss on Fri, 2009-11-20 02:58
There is an issue here. First off, the beneficiaries other than the Church will receive a Schedule K-1 from the Trust. They pay tax on the income attributable to the proceeds they receive. A charity does not get a Schedule K-1. A charitable deduction is available for transfers to charity from income. Although the IRA generates taxable income, it isn’t necessarily income for trust accounting purposes.
Trust accounting income should be defined in the trust agreement but often it is not. If the trust agreement says that distributions from retirement plans are considered income – there should be a charitable deduction for the amount transferred to the Church.
When the trust agreement is silent, you look to state tax law to determine whether the distribution is income or principal. In some states, it may be 10% income, 90% principal, other states apply a percentage to the IRA balance the previous year. If some or all of the IRA distribution is treated as principal for trust accounting purposes, only the amount assumed paid from income is deductible as a charitable contribution on Form 1041.
The church is not taxable on anything they receive. The issue is whether the trust or the other trust beneficiaries bear the tax on those proceeds.
Permalink Submitted by JAMES JOHNSON on Wed, 2022-03-16 19:50
I am certain that a Church will not pay any income tax upon inheriting an IRA. However, I can not locate a supporting Internal Revenue Code section to confirm this. Does anyone know what IRC section supportss this position?
Permalink Submitted by Alan - IRA critic on Wed, 2022-03-16 20:06
Sec 501(a) and 501(c).
Permalink Submitted by Bruce Steiner on Fri, 2009-11-20 03:23
Section 642(c) allows a charitable deduction for paid to charity pursuant to the Will or trust agreement. It doesn’t matter whether it’s income or principal for trust accounting purposes.
Courts in some states have considered the question of whether the benefit of the charitable deduction goes to the charity or to the estate or trust as a whole, with a few going one way, a few going the other way, and most states not having decided the question.
Permalink Submitted by Alan Spross on Fri, 2009-11-20 04:05
It was stated that this was a qualified trust, but not with a church as a trust beneficiary. However, with the stretch being taken off the table, I don’t see that it matters whether the trust was qualified.
Permalink Submitted by mk foss on Fri, 2009-11-20 18:43
Section 642(c) allows a trust a deduction for gross income paid to charity. The difficulty is in determining what is gross income – that’s when you go to state law. I had an IRS audit on this issue, and we lost some deductions when 52% of the estate was directed by the trust agreement to be paid to charity.
Permalink Submitted by Bruce Steiner on Fri, 2009-11-20 20:34
Gross income is a tax concept. It’s defined in Section 61.
Permalink Submitted by Harve Senter on Fri, 2009-11-20 21:04
[quote=”[email protected]“]Gross income is a tax concept. It’s defined in Section 61.[/quote]
Thanks to all for your help