Best practice for trust as beneficiary
I have a client whose uncle passed away leaving an IRA worth approx. $120000 with a trust as beneficiary. Decedent has designated a charitable donation of $100000. Trustee has started the process of liquidating the IRA and moving to the trust account to sit in cash until he makes the donation. Fed and state taxes will be withheld on the front end and he feels he would get the tax benefit of the donation on the back end.
Would he be better off leaving the IRA with the investment company and directing them to make the donation directly? Basically, is there a better tax benefit either way?
Many thanks
Permalink Submitted by Alan - IRA critic on Tue, 2022-02-01 16:58
The IRA custodian might resist an attempt of the trustee to assign the charitable interest directly to the charity. As for the 1041 filing which might include other income in addition to the IRA distribution, using withholding might eliminate the need for estimates, but either way the net taxable income to the trust will be 20k. With only 20,000 left from the IRA, it looks like a lump sum distribution will be made from the IRA and trust expenses might eat up much of that 20,000, not leaving much for the other trust beneficiary.
Permalink Submitted by Alan - IRA critic on Tue, 2022-02-01 16:58
The IRA custodian might resist an attempt of the trustee to assign the charitable interest directly to the charity. As for the 1041 filing which might include other income in addition to the IRA distribution, using withholding might eliminate the need for estimates, but either way the net taxable income to the trust will be 20k. With only 20,000 left from the IRA, it looks like a lump sum distribution will be made from the IRA and trust expenses might eat up much of that 20,000, not leaving much for the other trust beneficiary.
Permalink Submitted by Bruce Steiner on Tue, 2022-02-01 22:08
See CCA 200644020: https://www.irs.gov/pub/irs-wd/0644020.pdf. The IRS says that this would accelerate the income, and that there wouldn’t be any charitable deduction.
Why didn’t the IRA owner simply name the charity (on the IRA beneficiary designation) as a beneficiary to receive a share of the IRA?
Bruce Steiner