15 Pages Posted: 26 Sep 2015 Last revised: 6 Oct 2016
Date Written: September 24, 2015
Estates and trusts are recognizing growing amounts of taxable income from “income in respect of a decedent” (or “IRD”). These are payments attributable to income earned by a decedent before death but received by an estate, trust, or other beneficiary after death, and taxed to that recipient. The most common source of IRD is a distribution from an inherited retirement plan account, such as an IRA, 401(k) plan or a profit sharing plan. Since IRD can be taxed twice (once on an estate’s estate tax return and again on the estate’s income tax return), it is possible for a single charitable bequest of IRD to produce charitable tax deductions on both returns.
However, many estates and trusts that received IRD and also made charitable bequests were not able to claim a charitable income tax deduction. This was usually because the governing instrument – either the will or a trust instrument – failed to contain instructions to pay charitable bequests with IRD.
Another income tax problem occurs when a retirement account or appreciated property satisfies a pecuniary (i.e., fixed dollar) charitable bequest. The IRS contends that taxable income is triggered, and there might not be any offsetting charitable income tax deduction.
This article describes the best ways to structure a charitable bequest of retirement plan and other IRD assets (savings bonds, employee stock options, etc.), citing relevant court cases and IRS rulings. It recommends that every governing instrument contain instructions to “pay charitable bequests (if any) first with IRD (if any).” Sample drafting language is provided. Finally, the article describes techniques to avoid adverse tax consequences even when the governing instrument is missing these instructions.
Keywords: tax, income tax, estate, estate tax, trust, income in respect of a decedent, IRD, bequest, charity, charitable bequests, charitable gifts, charitable tax deduction, IRA, retirement plan, retirement account, 401(k), profit sharing, savings bond, economic effect, pecuniary
JEL Classification: D31, G23, H20, H24, K34, L31, M52
Suggested Citation: Suggested Citation