Your Estate Plan, Your Trusts, and Your Retirement Accounts

You should read this excellent short column by financial writer Arden Dale of The Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” on integrating IRAs, 401(k) plans, federal employee Thrift Savings Plan (TSP) accounts, and similar retirement savings accounts into estate and trust plans. The article deals primarily with choosing primary beneficiaries in a way that will minimize estate and income taxes. For most married retirement plan beneficiaries, that will mean choosing their spouses to receive the plan proceeds outright and free of trust, via a rollover after the first spouse’s death.Safeguard Your Retirement Plan For Children

However, trusts continue to be important contingent, or secondary, beneficiaries, especially for larger plans. The ability of your children or grandchildren (and in some cases, your spouse) to compound retirement plan investments over a long period of time makes IRAs and similar plans one of the most valuable tools for wealth succession planning for your family. Well-drafted retirement plan trusts help ensure that such plan “stretch-outs” will be administered property. I will normally recommend a separate IRA trust if you wish to

  • preserve and guard retirement plan assets from your beneficiaries’ “predators and creditors” – including remarriage spouses, your children’s and grandchildren’s creditors, and their improvidently-chosen spouses;
  • control distributions after your death (discourage or prevent a beneficiary from withdrawing all of the assets he inherits from you at once, absent a very good reason);
  • direct otherwise-reluctant retirement plan administrators to divide an account into separate accounts for your children;
  • limit payouts to any special-needs beneficiaries (including those who become disabled after your death) to protect ongoing government benefits; and
  • ensure that your retirement plan money stays in your family.

Generally speaking, if you and your spouse’s combined retirement plan assets exceed $250,000, it will be cost-effective for us create stand-alone retirement plan trusts for each spouse in addition to your Revocable Living Trust. If you’d like to arrange an appointment or a phone call, or receive more information via email, please call or email me, or use the contact tool in the sidebar.

(Updated: March 2017)

It’s Back! The Tax-Free IRA Charitable Rollover

Thanks to the Protecting Americans From Tax Hikes Act of 2015 (“PATH”), signed into law on December 18, 2015, Section 408(d)(8) of the Internal Revenue Code once again provides a $100,000 annual exclusion from gross income for charitable donations made directly from a traditional IRA by donors aged 70½ or older.

Donate HereFurthermore, this IRA “charitable rollover” provision has been made permanent (meaning it would take a vote of both Houses plus a presidential signature to change it), retroactive to January 1, 2015. This makes it much easier to plan for charitable rollover donations and make them without the year-end uncertainty that has plagued senior donors for the past several years.

Still IRAs Only

As in past years, distributions from 401Ks, 403Bs, TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. (However, you usually can roll assets from those plans into IRAs and then donate them if you begin the process early enough in the year.)

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds and “supporting organizations” are not eligible recipients.

And, as in the past, distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Under a special and favorable IRS rule under the charitable rollover provisions, distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA account, and then from any non-taxable portion. This is a distinct benefit to taxpayers who made non-deductible IRA contributions during their working years.

The Donor May Not Receive Anything Of Value

This rule can be harsh, so be careful. Any quid pro quo benefit or thing of value received by the donor in return for the charitable rollover distribution, such as the value of a dinner or other non-trivial benefit, may disqualifies the entire distribution, not just a portion equal to the benefit received, from IRA charitable rollover treatment.

Therefore, a careful donor will first advise the charity well in advance that: (1) a distribution will be made from an IRA account to the charity and that it is intended to constitute a “qualified charitable distribution” under IRC § 408(d); and (2) that no goods, services, or benefits of any kind are to be provided by the charity to the donor or any other person in consideration for the distribution. (Charities usually know this well, but it never huts to remind them.) In addition, a wise donor will request in advance that the charity provide a letter to the donor acknowledging the amount of the distribution that it received and confirming that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in exchange for the distribution.

Congress Procrastinates Again on Tax-Free Charitable IRA Rollovers

Once again, a special provision of the Tax Code offering older owners of individual retirement arrangements (IRAs) an advantageous way to make charitable donations, is scheduled to expire on December 31. For the remainder of 2013, a traditional IRA owner, age 70½ or over, may transfer directly, tax-free, up to $100,000 per year to an eligible charity, regardless of whether he or she itemizes income-tax deductions.

IRAs Only

Donation can and heartDistributions from 401Ks, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, if you hurry, you may be able to roll assets from those plans into IRAs and donate them before the giving deadline expires.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds and “supporting organizations” are not eligible recipients.

The distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Charitable Rollovers Are MRDs

Amounts transferred to a charity from an IRA are counted in determining whether you have met the IRA’s required minimum distribution (MRD) requirement. And if you have made both deductible and nondeductible contributions to your traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions made to you.