Navigating the Estate-bequest Terrain
And, if the surviving spouse is the only non-charitable beneficiary, she can roll any interest gained into an account under her own name.
But if the donor designates a specific sum to the charitable organization and the balance to an individual ($10,000 to charity; balance to daughter), the separate account rule noted above will not apply, and the $10,000 pecuniary bequest should be paid before the Sept. 30 deadline.
All beneficiaries are not created equal
But what if the estate of the donor is designated as the beneficiary of the qualified plan or IRA and his will leaves one-half to a charity and the other half to his son? Can the personal representative of the estate distribute one-half of the plan to the charity before Sept. 30 of the year following death and avoid the “all beneficiaries must be individuals” rule?
The answer, alas, is no. The estate will be deemed the beneficiary, and no matter how quickly distribution is made, not all beneficiaries will be considered individuals.
While this doesn’t harm the charitable organization’s interest, it can affect the son’s interest. Prospective donors may appreciate a heads up on this important point.
As a rule, naming a charitable organization as a beneficiary of a trust that is, in turn, the beneficiary of a qualified plan or IRA also presents problems for the non-charitable beneficiaries.
The regulations require that all trust beneficiaries be individuals and any charitable interest, no matter how remote or contingent, will cause the trust to fail to meet this test.
That said, the qualified plans and IRAs are good candidates to fund a charitable remainder unitrust, or CRUT.
Consider a CRUT
If the CRUT is the beneficiary of the qualified plan or IRA, it may take a lump-sum withdrawal and avoid the income tax that would otherwise be imposed on the IRD because of its charitable status.
Lisa B. Petkun is a partner in the tax department at Pepper Hamilton LLP.