Charitable Beneficiary Designations
Tax Avoidable on Charitable Beneficiary Designation for IRA or Qualified Plan. - Generally,
neither a retiree's estate nor a tax-exempt charity is subject to income tax on amounts the charity
receives as a beneficiary of the retiree's qualified retirement plan or IRA. However, the retiree
must carefully structure the charity’s beneficial interest in order to obtain a charitable deduction
for estate tax purposes. (Ltr. Rul. 200425027.) See Chapters 3, 5, and 6 of the Guide for
discussions of charitable beneficiary designations.
IRA Tax Developments
Distributions Taxed to Former Spouse Regardless of Community Property Laws. – A
distribution from a qualified retirement plan to a retiree's former spouse under a court’s
“qualified domestic relations order” (a QDRO) is generally taxable to the spouse. The Tax Court
has determined that community property laws of a state do not change this result – i.e., do not
make the distribution taxable to the retiree. Seidel v. Commissioner, T.C. Memo 2005-67 (2005).
See Chapter 3 of the Guide for a discussion of QDROS under qualified retirement plans.
Protection from Bankruptcy for Funds in IRAs and Retirement Plans. – Funds in IRAs and
qualified retirement plans are generally exempt from forfeiture in bankruptcy proceedings.
However, in the case of IRAs and Roth IRAs, an individual’s bankruptcy exemption is generally
limited to the sum of (a) $1,000,000, (b) the amount of funds rolled over from qualified plans
(and earnings thereon), and (c) funds in SEPS and Simple IRAs. (Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 224.) See Chapter 6 of the Guide,
generally, for a discussion of the taxation of funds in IRAs.
IRS Allows Correction of Overpayment of Required Minimum IRA Distributions. – An IRA
must start making minimum distributions by April 1 of the year after the owner reaches age 70
½. Recipients generally rely on their IRA administrators to compute and distribute the correct
amount. Where an administrator erroneously distributed an amount in excess of the required
minimum, the IRS ruled that the taxpayer could roll the excess back into his IRA – even though
the normal 60-day rollover period had expired. (Ltr. Rul. 200443034 and 200438046.)
For descriptions of other situations where the IRS has waived the 60-day rollover requirement,
click here. Also, see Chapter 9 of the Guide for a discussion of minimum distribution
requirements; see Chapter 6 of the guide for a discussion of the requirements for a rollover
from an IRA.
Division of an Inherited IRA Held by a Trust. – If a trust is the named beneficiary of an inherited
IRA, the beneficiaries of the trust may arrange transfers to new and separate inherited IRAs for
each trust beneficiary, provided the trust is a “see through” trust. A see-through trust is a trust
with identifiable individual beneficiaries that is irrevocable or that will automatically become
irrevocable upon the retiree’s death, and that satisfies certain procedural requirements.
However, the beneficiary of such a newly separated IRA who bases his required minimum
distributions on life expectancy must use the life expectancy of the oldest trust beneficiary –
unless the use of multiple trusts effectively allows each beneficiary to use his or her own life
expectancy. (Reg. § 1.401(a)(9)-4, Q&A 5; Ltr. Rul. 200809042; Ltr. Rul. 200537044.) See
Chapters 6 and 9 of the Guide for discussions of divisions of IRAs and trusts and the effect of
the divisions on minimum distribution requirements.
Use of Multiple Trusts to Maximize IRA Tax Deferral. – Generally, dividing an inherited IRA
(not held in trust) into separate accounts or separate inherited IRAs for each beneficiary will
allow the younger beneficiaries to maximize tax deferral on their interests in the IRA by taking
distributions over their longer lifetimes. Unfortunately, though, for this purpose, beneficiaries
may not treat as separate accounts or separate IRAs those interests of the beneficiaries
originally held indirectly through a trust. Nevertheless, a retiree may be able to solve this
problem neatly by providing for multiple trusts or sub-trusts, one for each beneficiary – if certain
other requirements are satisfied. (Ltr. Rul. 200537044.) See Chapter 9 of the Guide for a
discussion of the use of trusts in maximizing tax deferral.
Transfer of Funds from an IRA to a Health Savings Account. – If a retiree does not yet qualify
for Medicare, the retiree may be eligible to make tax-deductible contributions to a health savings
account (HSA). An HSA is an account that pays medical expenses not otherwise covered by a
high deductible health plan.
After 2006, a taxpayer may make a nontaxable trustee-to-trustee transfer of funds to an HSA
from an IRA (but not from a "simple retirement account" or a "simplified employee pension").
The transfer is not deductible, and the taxpayer may generally make only one such transfer
during his or her lifetime. In addition, the total contributions to HSAs and Archer MSAs for the
year (including the IRA transfer) may not exceed the usual annual limitation on such
contributions. (Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, § 307; I.R.C. §§
223, 408(d)(9)) See Chapter 6 of the Guide for a discussion of the taxation of IRAs.
Division of IRA in Divorce with Consequent Reduction of Distributions. – The transfer of one-
half of the funds in an IRA to the taxpayer’s divorcing spouse is not taxable to the taxpayer.
Furthermore, if the taxpayer were receiving substantially equal periodic payments to avoid the 10
percent penalty tax on early distributions, a proper reduction in the amount of those payments to
account for the division of funds will not trigger the 10 percent penalty tax. (Ltr. Rul. 200717026.)
See Chapter 6 of the Guide for a discussion of the 10 percent penalty tax on early distributions.
The IRS Allowed an IRA Loan to a Church Secured by Life Insurance. – The IRS allowed a
taxpayer’s IRA to loan money to a church, with the loan secured by an insurance policy on the
taxpayer’s life. The taxpayer was not a board member or employee of the church and did not
own, control, or have a financial interest in the church. In addition, the church was the sole
owner of the life insurance policy and enjoyed all the rights under the policy, subject to
restrictions imposed by the security agreement. (Ltr. Rul. 200741016.) See Chapter 6 of the
Guide for a discussion of prohibited IRA investments and transactions.
Personal Sale of Stock at a Loss and Repurchase by an IRA. – The tax law generally does not
allow a taxpayer to deduct a loss on the sale of stock or securities if the taxpayer purchases
substantially identical stock or securities within 30 days after the sale (a so-called "wash sale").
The IRS has now held that the loss remains nondeductible even if the taxpayer's IRA
repurchases the substantially identical stock. Furthermore, in such a case, the taxpayer may not
increase his or her cost basis in the IRA to account for the excess of the IRA's repurchase price
over the taxpayer’s sales price. (Rev. Rul. 2008-5, 2008-3 I.R.B. ___.) See Chapter 6 of the
Guide for a discussion of the taxation of IRAs.
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Tax Avoidable on Charitable Beneficiary Designation for IRA or Qualified Plan. - Generally,
neither a retiree's estate nor a tax-exempt charity is subject to income tax on amounts the charity
receives as a beneficiary of the retiree's qualified retirement plan or IRA. However, the retiree
must carefully structure the charity’s beneficial interest in order to obtain a charitable deduction
for estate tax purposes. (Ltr. Rul. 200425027.) See Chapters 3, 5, and 6 of the Guide for
discussions of charitable beneficiary designations.
IRA Tax Developments
Distributions Taxed to Former Spouse Regardless of Community Property Laws. – A
distribution from a qualified retirement plan to a retiree's former spouse under a court’s
“qualified domestic relations order” (a QDRO) is generally taxable to the spouse. The Tax Court
has determined that community property laws of a state do not change this result – i.e., do not
make the distribution taxable to the retiree. Seidel v. Commissioner, T.C. Memo 2005-67 (2005).
See Chapter 3 of the Guide for a discussion of QDROS under qualified retirement plans.
Protection from Bankruptcy for Funds in IRAs and Retirement Plans. – Funds in IRAs and
qualified retirement plans are generally exempt from forfeiture in bankruptcy proceedings.
However, in the case of IRAs and Roth IRAs, an individual’s bankruptcy exemption is generally
limited to the sum of (a) $1,000,000, (b) the amount of funds rolled over from qualified plans
(and earnings thereon), and (c) funds in SEPS and Simple IRAs. (Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 224.) See Chapter 6 of the Guide,
generally, for a discussion of the taxation of funds in IRAs.
IRS Allows Correction of Overpayment of Required Minimum IRA Distributions. – An IRA
must start making minimum distributions by April 1 of the year after the owner reaches age 70
½. Recipients generally rely on their IRA administrators to compute and distribute the correct
amount. Where an administrator erroneously distributed an amount in excess of the required
minimum, the IRS ruled that the taxpayer could roll the excess back into his IRA – even though
the normal 60-day rollover period had expired. (Ltr. Rul. 200443034 and 200438046.)
For descriptions of other situations where the IRS has waived the 60-day rollover requirement,
click here. Also, see Chapter 9 of the Guide for a discussion of minimum distribution
requirements; see Chapter 6 of the guide for a discussion of the requirements for a rollover
from an IRA.
Division of an Inherited IRA Held by a Trust. – If a trust is the named beneficiary of an inherited
IRA, the beneficiaries of the trust may arrange transfers to new and separate inherited IRAs for
each trust beneficiary, provided the trust is a “see through” trust. A see-through trust is a trust
with identifiable individual beneficiaries that is irrevocable or that will automatically become
irrevocable upon the retiree’s death, and that satisfies certain procedural requirements.
However, the beneficiary of such a newly separated IRA who bases his required minimum
distributions on life expectancy must use the life expectancy of the oldest trust beneficiary –
unless the use of multiple trusts effectively allows each beneficiary to use his or her own life
expectancy. (Reg. § 1.401(a)(9)-4, Q&A 5; Ltr. Rul. 200809042; Ltr. Rul. 200537044.) See
Chapters 6 and 9 of the Guide for discussions of divisions of IRAs and trusts and the effect of
the divisions on minimum distribution requirements.
Use of Multiple Trusts to Maximize IRA Tax Deferral. – Generally, dividing an inherited IRA
(not held in trust) into separate accounts or separate inherited IRAs for each beneficiary will
allow the younger beneficiaries to maximize tax deferral on their interests in the IRA by taking
distributions over their longer lifetimes. Unfortunately, though, for this purpose, beneficiaries
may not treat as separate accounts or separate IRAs those interests of the beneficiaries
originally held indirectly through a trust. Nevertheless, a retiree may be able to solve this
problem neatly by providing for multiple trusts or sub-trusts, one for each beneficiary – if certain
other requirements are satisfied. (Ltr. Rul. 200537044.) See Chapter 9 of the Guide for a
discussion of the use of trusts in maximizing tax deferral.
Transfer of Funds from an IRA to a Health Savings Account. – If a retiree does not yet qualify
for Medicare, the retiree may be eligible to make tax-deductible contributions to a health savings
account (HSA). An HSA is an account that pays medical expenses not otherwise covered by a
high deductible health plan.
After 2006, a taxpayer may make a nontaxable trustee-to-trustee transfer of funds to an HSA
from an IRA (but not from a "simple retirement account" or a "simplified employee pension").
The transfer is not deductible, and the taxpayer may generally make only one such transfer
during his or her lifetime. In addition, the total contributions to HSAs and Archer MSAs for the
year (including the IRA transfer) may not exceed the usual annual limitation on such
contributions. (Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, § 307; I.R.C. §§
223, 408(d)(9)) See Chapter 6 of the Guide for a discussion of the taxation of IRAs.
Division of IRA in Divorce with Consequent Reduction of Distributions. – The transfer of one-
half of the funds in an IRA to the taxpayer’s divorcing spouse is not taxable to the taxpayer.
Furthermore, if the taxpayer were receiving substantially equal periodic payments to avoid the 10
percent penalty tax on early distributions, a proper reduction in the amount of those payments to
account for the division of funds will not trigger the 10 percent penalty tax. (Ltr. Rul. 200717026.)
See Chapter 6 of the Guide for a discussion of the 10 percent penalty tax on early distributions.
The IRS Allowed an IRA Loan to a Church Secured by Life Insurance. – The IRS allowed a
taxpayer’s IRA to loan money to a church, with the loan secured by an insurance policy on the
taxpayer’s life. The taxpayer was not a board member or employee of the church and did not
own, control, or have a financial interest in the church. In addition, the church was the sole
owner of the life insurance policy and enjoyed all the rights under the policy, subject to
restrictions imposed by the security agreement. (Ltr. Rul. 200741016.) See Chapter 6 of the
Guide for a discussion of prohibited IRA investments and transactions.
Personal Sale of Stock at a Loss and Repurchase by an IRA. – The tax law generally does not
allow a taxpayer to deduct a loss on the sale of stock or securities if the taxpayer purchases
substantially identical stock or securities within 30 days after the sale (a so-called "wash sale").
The IRS has now held that the loss remains nondeductible even if the taxpayer's IRA
repurchases the substantially identical stock. Furthermore, in such a case, the taxpayer may not
increase his or her cost basis in the IRA to account for the excess of the IRA's repurchase price
over the taxpayer’s sales price. (Rev. Rul. 2008-5, 2008-3 I.R.B. ___.) See Chapter 6 of the
Guide for a discussion of the taxation of IRAs.
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| Copyright © 2005-2008 by Vorris J. Blankenship All Rights Reserved |
The author intends that this website provide accurate and authoritative information on the subject matter
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
Key Tax Developments Affecting Retirees
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