Article On Deductions for Charitable Bequests of IRD
Christopher R. Hoyt (Professor, University of Missouri at Kansas City – School of Law) recently published an article entitled, Income Tax Deductions for Charitable Bequests of IRD. Provided below is an abstract of the article:
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.
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).” Despite the fact that such instructions do not have an economic effect on the amount of the charitable gift, the author demonstrates that the 2012 “economic effect” regulations will not prevent an estate or trust from claiming a charitable income tax deduction to offset the taxable IRD. Finally, the article describes ways to make charitable dispositions of IRD assets without adverse income tax consequences even when the governing instrument is missing these instructions.