Trust inherited IRA and charitable gifts
My wife’s stepfather passed away earlier this year and designated his Trust as the sole beneficiary of his IRA.
His Trust includes instructions to gift a portion of the IRA to designated charities, with the balance reserved for other purposes. We’re trying to determine the most tax-efficient way to handle these gifts since we understand the maximum tax rate income threshold for a Trust is very low ($12,500 or thereabouts).
After some reading on the Secure Act, it seems he should have been advised by his estate planner to include the charities with the Trust as designated beneficiaries of his IRA to avoid taxes, but that’s water under the bridge.
What tax strategies might we employ at this point?
We’d thought to delay and gift some charities this year, up to the income threshold above, and gift the rest early next year, but that’ll save little since the total amount of the gifts is $125,000.
Is a transfer-in-kind of investments held by the IRA possible, such that the charities would then liquidate those tax-free?
Any other ideas?
Permalink Submitted by Brian Hassink on Sat, 2022-04-09 16:21
A follow-up as I read more articles on this subject. It seems that because the IRA distributions will flow through the Trust and are not held by it, the distributable net income (DNI) will cancel out any taxes at the Trust level and pass taxation on to the beneficiaries. Since these beneficiaries are qualified charities, there is no taxation. Do I have that understanding correct?
Permalink Submitted by Alan - IRA critic on Sun, 2022-04-10 01:48
There is only one estate attorney active on this site (Bruce Steiner). But the plan appears to have structural issues with possibly a difficult solution. And that does not even include an additional issue if the trust includes pecuniary donations which must be paid from IRA money. See the following link:
IRS Private Letter Ruling Re: Pecuniary Bequests to Charities (natlawreview.com)
Permalink Submitted by Brian Hassink on Sun, 2022-04-10 17:37
I read the link a few times, and think there is a small but perhaps pivotal difference in that our Trust does specify that the IRA is to be used to fund the charitable gifts. In other words, the Trust in the link went through a court petitioned reform that aligns with our Trust as it already is, and that reform was disallowed in the PLR because it was for tax advantage purposes. So this ruling would seem to validate that for our Trust, the IRA distribution is a non-taxable event in the eyes of the IRS.
Permalink Submitted by Bruce Steiner on Sun, 2022-04-10 22:15
Alan: thanks for the kind wordsl
What is “his trust?” He’s dead, so he can’t be the beneficiary of a trust.
You are correct that the beneficiary designation doesn’t make sense. He should have designated the charities and the individual beneficiaries of the trust (or trusts for their benefit) as the beneficiaries of the IRA.
It would help to know exactly what the trust says as to who gets what.
It would also help to know exactly what the reformation says.
You may want to yell and scream at whoever planned this estate.
Permalink Submitted by Brian Hassink on Mon, 2022-04-11 02:24
Sorry. By his/our Trust, I’m referring to the Trust that was created to be the sole beneficiary of the decedent’s IRA, with instructions to make specific one-time gifts from the IRA to certain charities. In reviewing PLR 201438014 on the IRS site, that Trust was reformed to treat the distribution of IRA assets to charities as direct bequests, in order to qualify the Trust income for a charitable deduction. The Trust we are working with already makes such direct bequests from the IRA. The IRS rejected the reform because made for tax advantage rather than some resolution of conflict. I agree the estate planner did not handle this correctly with respect to IRA beneficiaries but am grateful for the reference to this PLR since it seems we got lucky the Trust does include the appropriate language for the bequests. My only concern at this point is whether the Secure Act has upended the rules that were in place at the time of this PLR back in 2014.
Permalink Submitted by Bruce Steiner on Tue, 2022-04-12 20:58
I’m not sure what this has to do with the SECURE Act.
I would suggest that the trustees consult with competent tax/estates counsel other than the one who planned the estate.
Bruce Steiner