Navigating the Estate-bequest Terrain

Had the donor simply left half of his assets to his son and alma mater, respectively, the college would have wasted half the benefit of the step-up in basis on the appreciated securities and the son would be burdened with half the IRD.

Therefore, creative use of qualified plans and IRAs can produce a win-win situation for all involved.

Challenges of beneficiary designations
The most common way of passing interest in a qualified plan or IRA is through a beneficiary designation. If a donor names a charitable organization as the sole beneficiary of a qualified plan or IRA, the charity can simply collect the plan or account proceeds upon her death.

As a tax-exempt organization, the charity will not pay federal income tax on the amounts distributed, and the estate will receive a tax deduction for the amount passing to the organization. If, however, the donor wants to divide the qualified plan or IRA assets between a charity and an individual, more planning is necessary.

Naming a charity as one of multiple beneficiaries of a qualified plan or IRA will not affect the interest of the charity, but it can affect interest of the individual beneficiaries — and not necessarily in a favorable way.

The balance in the qualified plan or IRA must be distributed within five years of the death — if the donor had not attained age 70.5 at death. Otherwise, it would be distributed over the donor’s remaining life expectancy, if death occurs after age 70.5. But there are ways to avoid this.

If the interest passing to the charity is fully distributed before Sept. 30 of the year following the year of the donor’s death, it will be ignored for purposes of determining whether all beneficiaries are individuals.

But if the interests of the charity and the individual beneficiary constitute separate accounts — e.g., one half to charity, one half to the daughter — the daughter will be able to use her life expectancy to compute the minimum-required distributions from his separate account.