Navigating the Estate-bequest Terrain

Thus, if a donor wants to benefit a charity but also needs to provide for another individual, a CRUT should do the trick.

The CRUT takes the lump-sum withdrawal, then pays the unitrust amount to the individual beneficiary. The unitrust amount will be larger because the underlying principal was not reduced by the payment of income tax on the IRD. The estate will receive a charitable deduction for the value of the charitable remainder.

Had the individual been the sole beneficiary of the qualified plan or IRA, all distributions to her would have been taxed at ordinary rates.

However, distributions from a CRUT will be taxed to the individual beneficiary according to the type of income it represents, under special “tiering” rules applicable only to remainder trusts.

Thus, it is possible that a unitrust distribution may be taxed to the individual beneficiary — at least in part, at capital gains rates.

Unfortunately, for the moment, the benefits of funding charitable gifts using qualified plan or IRA assets are available only at death. There are not many opportunities to use these assets for lifetime charitable planning.

However, a perennial bill in Congress could alter this reality. In its most recent state, the bill allows direct transfers from an IRA to a charity without requiring the owner to include the distribution in her taxable income.

These bills pass the House and Senate regularly, but they never seem to make it out of conference. If they become law, a whole new source of charitable giving will be available:

1. Profit sharing plans, 401(k) and 403(b) accounts.
2. Roth IRAs are not subject to federal income tax.

Kathleen A. Stephenson is of counsel with the Philadelphia office of Pepper Hamilton LLP. Lisa B. Petkun is a partner in the tax department of Pepper Hamilton. On the Record keeps readers up to date on the latest tax and planning issues pertaining to fundraising endeavors and charitable organizations.