Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Many tax preparers relied on that regulation, to allocate retirement accounts to
satisfy the charitable gift and claimed a charitable deduction for the full amount
paid to the charity. This treatment was successful sometimes. See PLR
200234019 and PLR 200845029. However, in other circumstances the IRS would
not honor wills or trusts that attempted to identify the source of the income used
to satisfy charitable gifts. See IRS Letter Rulings 9539009 & 9750020 and RIA
K-3345.1. This author (and other commentators) saw inconsistency in the IRS
treatment of this type of situation.
However, that IRS regulation was amended in 2012 to provide that the allocation
of specific assets to fund specific gifts must have economic effect
independent of income tax consequences to be honored. See Appendix
pages 15 – 16 for the text of the current regulation. The IRS’s position is that the
prior law implicitly (by implied cross references to other IRS regulations)
required independent economic effect other than tax consequences to allow the
document to control the source of the charitable distribution. Their position is
that the new regulation only clarified the existing law.
RESULT (of Example D):
• 10% of the estate is given to charity so 10% of the IRA withdrawal is
considered to have been given to charity. The estate gets a $20,000
income tax deduction for the $40,000 given to charity.
• The children are taxed on 90% of the IRA withdrawal.
Example E – Direct Beneficiary To Charity: Betty owns the following assets (same
assets as Example B):
IRA $200,000
home 100,000
Bank savings and C/D’s 100,000
Betty creates a direct beneficiary designation which gives $40,000 from her IRA
account directly to her favorite charity.
The remainder of her estate (including the rest of the IRA) is given to her
children.
RESULT:
• The entire $40,000 charitable gift comes from the IRA account. No part
of that gift is included in the estate’s taxable income.
• This concept works very well if the client wants a specific sum or a
specific percentage of the retirement account given to the charity.
• If the value of her assets changes, then the $40,000 gift to charity may
not be her intended 10% gift of her entire estate to charity. This type of
designation may need routine adjustment if maintaining a specific
percentage of her estate is important to the client.
14