Donations to offset RMD’s
I have 82 year old clients in the state of Delaware who inherited an estate from their deceased 58 year old son. In the estate was a 401K with about $350K in it. Part of the estate was collectibles from their sons library.(probably in excess of $100,000) They plan on donating this. I was wondering if the deduction on the charitable donation would be enough to offset the taxes on the RMD’s, or should we consider a converting the money to ROTH if the deduction is great enough?
Thanks
Brian
Permalink Submitted by Alan Spross on Tue, 2011-10-04 23:25
Who was the actual beneficiary on the 401k, the estate or the designated parents?
Permalink Submitted by Brian Zeek on Tue, 2011-10-04 23:27
The parents pretty much inherited all.
Permalink Submitted by mk foss on Wed, 2011-10-05 00:51
Individuals can take a charitable deduction for property given to charity whether purchased or inherited. The deduction is at the fair market value of the items donated. For gifts over $5,000 they will need an appraisal as well as an acknowledgement from the charity. The appraiser must sign the Form 8283 attached to their income tax return for the year of the gift.
Nonspouse beneficiaries can convert an inherited 401(k) plan to a ROTH IRA. They get no deduction for that, it’s all reported as income. The RMDs from a $350k 401(k) plan would be much less than the tax on the Roth conversion.
They could also consider a donation made with a charitable remainder trust, pooled income fund or other arrangement where they get a charitable deduction plus an income stream for life. An 82 year old has 9 years to take RMDs.They can take more than the RMD in any year to offset a large charitable deduction.
Permalink Submitted by Brian Zeek on Wed, 2011-10-05 01:49
Thanks much. I would agree on the ROTH idea. It would be a way of eliminating the RMD going forward for heirs along with taxes.
Permalink Submitted by Alan Spross on Wed, 2011-10-05 02:45
You still did not clarify HOW the parents inherited, ie was the estate the actual or default beneficiary or were their actual names listed as beneficiaries on the plan beneficiary form?
This is critical because an inherited qualified plan cannot be converted to a non spouse inherited Roth IRA UNLESS the parents were specifically named. If the plan went to the estate and the parents were beneficiaries under a will or intestate determination, no conversion can take place. Further, the 5 year rule would apply as opposed to life expectancy RMDs.
Permalink Submitted by Brian Zeek on Wed, 2011-10-05 02:55
They were designated as the beneficiaries.
Permalink Submitted by Alan Spross on Wed, 2011-10-05 03:12
OK, then all or part of the balance can be converted to an inherited Roth. There will still be RMDs from the inherited Roth, but they should not touch earnings until the 5 year holding period has been reached.
You might also consider whether there is any highly appreciated employer stock in the plan that would qualify for NUA treatment and the lower LT cap gain rate. Perhaps some combination treatment of the plan would make sense pending complete analysis of all options.