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 2, 4, and 5 of the treatise for
discussions of charitable beneficiary designations.
Required Minimum Distributions for Plans and IRAs
Suspension of Minimum Distribution Requirements for 2009. – Congress has eliminated
minimum distribution requirements for IRAs and defined contribution plans for the year 2009.
Thus, a retiree who chooses to take distributions in 2009 from an IRA or defined contribution plan
may transfer or roll over even the portion that would have been a required minimum distribution
absent the suspension. Although a plan or IRA is not required to make trustee-to-trustee
transfers of such suspended amounts, it may do so if it chooses. In addition, the direct
distribution of such amounts to a retiree by a defined contribution plan is not subject to the
normal 20 percent tax withholding, and the retiree may elect to eliminate other types of
withholding tax.
However, this provision does not affect a retiree’s required beginning date for distributions. For
example, a retiree whose required beginning date is April 1, 2010 need not take a minimum
distribution for 2009. However, the retiree must take the required minimum distribution for 2010
no later than the last day of that year. Even after the retiree’s death, the retiree’s beneficiary must
also use the retiree’s normal required beginning date to determine the applicable method for
determining minimum distributions. In addition, if the five-year minimum distribution rule applies
to a beneficiary, the beneficiary does not count 2009 as one of the five years. For example, the five-
year period ends in 2012, instead of 2011, for a retiree who died in 2006. (I.R.C. § 401(a)(9)(H).)
Other collateral effects of the suspension include the following:
1. Any 2009 deadline for an election of the five-year distribution rule or the life expectancy rule is
extended until the end of 2010.
2. A nonspouse beneficiary of a decedent dying in 2008 (who participated in a plan requiring use
of the five-year distribution rule) has until the end of 2010 to make a direct rollover to an IRA and
elect the life expectancy rule.
3. Spousal consent to the 2009 suspension of required minimum distributions is generally not
required if the parties did not choose a new annuity starting date.
4. The suspension of required minimum distributions for 2009 does not suspend periodic
payments that allow a retiree to avoid the 10 percent penalty tax on premature distributions.
(I.R.C. § 401(a)(9)(H); Notice 2008-82, 2009-41 I.R.B. ___.) See Chapter 8 of the treatise for a
discussion of required minimum distributions.
Minimum Distribution Flexibility for Certain Government Plans. – Proposed regulations
indicate that qualified governmental plans and eligible state/local plans have more latitude in
complying with minimum distribution requirements than other types of plans. The proposed
regulations treat these government plans as satisfying minimum distribution requirements if the
plans comply with a reasonable and good faith interpretation of the Code – apparently, even if that
interpretation is contrary to regulatory provisions. (Prop. Reg. § 1.401(a)(9)-1, Q&A 2(d).) See
Chapter 8 of the treatise for minimum distribution requirements.
Beneficiary Designation by Judicial Reformation. – Beneficiaries of tax-favored retirement plans
qualifying as "designated beneficiaries" may be eligible for longer distribution periods than other
beneficiaries. However, a retiree may fail to properly name a designated beneficiary. In a private
ruling, the IRS allowed an individual to become a designated beneficiary by reason of a state
court reformation of a beneficiary designation form, at least where convincing evidence indicated
that was consistent with the retiree's original intention. However, in a more recent ruling, the IRS
refused to recognize a trust reformation that attempted to eliminate non-individual beneficiaries of
an IRA and thereby allow the post-mortem "creation" of designated beneficiaries. (Ltr. Ruls.
200616039 and 201021038.) See Chapter 8 of the treatise for a discussion of designated
beneficiaries.
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 2 of the treatise 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. This bankruptcy exemption should
also protect inherited IRAs. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. No. 109-8, § 224; In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010); In re Tabor, 2010-1 U.S.
T.C. 50,479 (Bankr. M.D. Pa.) (inherited IRAs). To the contrary, in a poorly reasoned opinion, see
In re Chilton, 2010-1 U.S.T.C. 50,275 (Bankr. E.D. Tex.).) See Chapter 5 of the treatise, 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 8 of the treatise for a discussion of minimum distribution
requirements; see Chapter 5 of the treatise 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 5 and 8 of the treatise 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 8 of the treatise 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 5
of the treatise 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 5 of the treatise 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 5 of the treatise 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 5 of the
treatise for a discussion of the taxation of IRAs.
IRA Distributions Paid Directly to Charities. – During the years 2006 through 2009, a retiree age
70 ½ or older may exclude from taxable income certain distributions paid by his or her IRA directly
to a qualified charity. The amount of excludable charitable distributions for a given year is limited
to the lesser of (1) $100,000, (2) the amount of the payments to the charity, or (3) the portion of
IRA funds otherwise deemed potentially taxable. (I.R.C. § 408(d)(8); Notice 2007-7, 2007-5 I.R.B.
395.) See Chapter 5 of the treatise for a discussion of the taxation of IRAs.
Withdrawal of After-Tax Excess Contributions – A taxpayer may avoid penalties on an excess
contribution by withdrawing it before his or her return is due for the year of the contribution.
However, if the taxpayer does not make a timely withdrawal, a subsequent withdrawal is taxable
as an ordinary distribution. (Ltr. Rul. 200904029; I.R.C. § 408(d)(4).) See Chapters 2, 4, 5, and 6
of the treatise for an explanation of the taxation of distributions from tax-favored plans and
arrangements.
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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 2, 4, and 5 of the treatise for
discussions of charitable beneficiary designations.
Required Minimum Distributions for Plans and IRAs
Suspension of Minimum Distribution Requirements for 2009. – Congress has eliminated
minimum distribution requirements for IRAs and defined contribution plans for the year 2009.
Thus, a retiree who chooses to take distributions in 2009 from an IRA or defined contribution plan
may transfer or roll over even the portion that would have been a required minimum distribution
absent the suspension. Although a plan or IRA is not required to make trustee-to-trustee
transfers of such suspended amounts, it may do so if it chooses. In addition, the direct
distribution of such amounts to a retiree by a defined contribution plan is not subject to the
normal 20 percent tax withholding, and the retiree may elect to eliminate other types of
withholding tax.
However, this provision does not affect a retiree’s required beginning date for distributions. For
example, a retiree whose required beginning date is April 1, 2010 need not take a minimum
distribution for 2009. However, the retiree must take the required minimum distribution for 2010
no later than the last day of that year. Even after the retiree’s death, the retiree’s beneficiary must
also use the retiree’s normal required beginning date to determine the applicable method for
determining minimum distributions. In addition, if the five-year minimum distribution rule applies
to a beneficiary, the beneficiary does not count 2009 as one of the five years. For example, the five-
year period ends in 2012, instead of 2011, for a retiree who died in 2006. (I.R.C. § 401(a)(9)(H).)
Other collateral effects of the suspension include the following:
1. Any 2009 deadline for an election of the five-year distribution rule or the life expectancy rule is
extended until the end of 2010.
2. A nonspouse beneficiary of a decedent dying in 2008 (who participated in a plan requiring use
of the five-year distribution rule) has until the end of 2010 to make a direct rollover to an IRA and
elect the life expectancy rule.
3. Spousal consent to the 2009 suspension of required minimum distributions is generally not
required if the parties did not choose a new annuity starting date.
4. The suspension of required minimum distributions for 2009 does not suspend periodic
payments that allow a retiree to avoid the 10 percent penalty tax on premature distributions.
(I.R.C. § 401(a)(9)(H); Notice 2008-82, 2009-41 I.R.B. ___.) See Chapter 8 of the treatise for a
discussion of required minimum distributions.
Minimum Distribution Flexibility for Certain Government Plans. – Proposed regulations
indicate that qualified governmental plans and eligible state/local plans have more latitude in
complying with minimum distribution requirements than other types of plans. The proposed
regulations treat these government plans as satisfying minimum distribution requirements if the
plans comply with a reasonable and good faith interpretation of the Code – apparently, even if that
interpretation is contrary to regulatory provisions. (Prop. Reg. § 1.401(a)(9)-1, Q&A 2(d).) See
Chapter 8 of the treatise for minimum distribution requirements.
Beneficiary Designation by Judicial Reformation. – Beneficiaries of tax-favored retirement plans
qualifying as "designated beneficiaries" may be eligible for longer distribution periods than other
beneficiaries. However, a retiree may fail to properly name a designated beneficiary. In a private
ruling, the IRS allowed an individual to become a designated beneficiary by reason of a state
court reformation of a beneficiary designation form, at least where convincing evidence indicated
that was consistent with the retiree's original intention. However, in a more recent ruling, the IRS
refused to recognize a trust reformation that attempted to eliminate non-individual beneficiaries of
an IRA and thereby allow the post-mortem "creation" of designated beneficiaries. (Ltr. Ruls.
200616039 and 201021038.) See Chapter 8 of the treatise for a discussion of designated
beneficiaries.
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 2 of the treatise 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. This bankruptcy exemption should
also protect inherited IRAs. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. No. 109-8, § 224; In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010); In re Tabor, 2010-1 U.S.
T.C. 50,479 (Bankr. M.D. Pa.) (inherited IRAs). To the contrary, in a poorly reasoned opinion, see
In re Chilton, 2010-1 U.S.T.C. 50,275 (Bankr. E.D. Tex.).) See Chapter 5 of the treatise, 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 8 of the treatise for a discussion of minimum distribution
requirements; see Chapter 5 of the treatise 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 5 and 8 of the treatise 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 8 of the treatise 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 5
of the treatise 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 5 of the treatise 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 5 of the treatise 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 5 of the
treatise for a discussion of the taxation of IRAs.
IRA Distributions Paid Directly to Charities. – During the years 2006 through 2009, a retiree age
70 ½ or older may exclude from taxable income certain distributions paid by his or her IRA directly
to a qualified charity. The amount of excludable charitable distributions for a given year is limited
to the lesser of (1) $100,000, (2) the amount of the payments to the charity, or (3) the portion of
IRA funds otherwise deemed potentially taxable. (I.R.C. § 408(d)(8); Notice 2007-7, 2007-5 I.R.B.
395.) See Chapter 5 of the treatise for a discussion of the taxation of IRAs.
Withdrawal of After-Tax Excess Contributions – A taxpayer may avoid penalties on an excess
contribution by withdrawing it before his or her return is due for the year of the contribution.
However, if the taxpayer does not make a timely withdrawal, a subsequent withdrawal is taxable
as an ordinary distribution. (Ltr. Rul. 200904029; I.R.C. § 408(d)(4).) See Chapters 2, 4, 5, and 6
of the treatise for an explanation of the taxation of distributions from tax-favored plans and
arrangements.
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| Copyright © 2005-2010 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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