DESIGNATING A BENEFICIARY OF RETIREMENT ASSETS

Transcription

1 DESIGNATING A BENEFICIARY OF RETIREMENT ASSETS Jay P. Tarshis Arnstein & Lehr LLP 120 South Riverside Plaza 12 th Floor Chicago, Illinois jptarshis@arnstein.com

2 1. General Considerations. Retirement benefits represent a large portion of many client s assets. Integrating the testamentary disposition of a client s retirement benefits with their estate plan presents a number of challenges. Handling retirement benefits in an estate plan requires an understanding of several different tax and non-tax laws: federal and state estate tax rules, federal income tax rules (including the required minimum distribution rules or MRD rules ) and ERISA. In addition, domestic relations laws and local property laws (such as community property laws) may impact a client s benefits. Retirement benefits are potentially subject to both estate and income taxes. This presents the possibility of a double tax for some individuals. The game plan for many individuals will be to take advantage of the tax-free growth available from a qualified retirement plan ( QRP ) or IRA (and, in effect, reduce the economic impact of the double tax ) by deferring benefit distributions, both during lifetime and after death, as long as possible. Planning to minimize taxes on retirement benefits, while disposing of benefits consistent with the owner s estate plan, presents a unique challenge. 2. Retirement Vehicles. Retirement benefits are not one size fits all. Different rules (tax and ERISA) govern QRP s vs. IRA s. Also, rules may differ for different types of QRP s and IRA s (Roth vs. regular). Moreover, retirement benefits come in many different flavors : Employer sponsored QRP s, such as a traditional pension plan, 401(k) plan or defined contribution (money purchase) pension plan 403(b) plan 457 plan Regular and Roth IRA s Non-qualified retirement benefits A QRP may limit the time and manner in which benefits will be distributed, either during lifetime or after death. Some limits, such as spousal survivor/consent rules, are mandatory. Other limits may be plan-specific. For example, some QRP s allow a participant to withdraw benefits while employed; other QRP s require a termination of employment to allow a benefit distribution. It is therefore important to know your plan. In contrast, generally, an IRA owner may decide how/when benefits will be withdrawn from an IRA (subject to applicable penalty taxes for early or late withdrawals).

3 3. Spousal Consent. QRP s are subject to spousal consent requirements for married participants. These rules limit the manner in which benefits may be distributed during lifetime and post-death, and often complicate estate planning for retirement benefits. Navigating the spousal consent requirements will be necessary if benefits of a married participant in a QRP will be paid or allocated to a non-spouse beneficiary, including a trust or children. No spousal consent rules apply to IRA s in Illinois (or other non-community property states). Generally, spousal consent rules for retirement (lifetime) distributions are as follows: For all defined benefit (DB) pension plans (and some defined contribution (DC) plans) normal retirement benefit must be paid in the form of a joint and survivor annuity with spouse, unless spousal consent is obtained for a different form of benefit. IRC 401(a)(11) and 417; ERISA 205, 29 U.S.C This rule is sometimes called the survivor annuity rule (since benefits are paid in a manner which provides an annuity to the surviving spouse). For most DC plans retirement benefits may be paid in a lump sum (nonannuity) to the participant if the spousal death benefit requirement is satisfied by the QRP. The spousal death benefit requirement is satisfied if (1) the benefit payable at the participant s death must be paid directly to the surviving spouse (unless the surviving spouse consents to a different beneficiary), (2) the participant does not elect to receive his or her benefits in the form of a life annuity, and (3) no part of the benefits is attributable to benefits from another QRP protected by the survivor annuity rule or spousal death benefit requirements. IRC 401(a)(11)(B)(iii); Treas. Reg (a)-20, Q&A 3(a), Q&A 5. The spousal consent rules for death benefits are as follows: For all DB plans (and some DC plans) - death benefit for a married participant must be paid in the form of a spousal survivor (life) annuity, unless spousal consent is obtained. This means that after the participant s death, his or her spouse continues to receive a life annuity. IRC 401(a)(11)(A). For most DC plans surviving spouse must be the sole direct beneficiary of the participant s death benefit, unless spousal consent is obtained. IRC 401(a)(11)(B)(iii). Note: In most cases, a participant in a QRP will want his/her death benefit paid in a form other than an annuity to a surviving spouse. This allows greater planning 2

4 flexibility by (1) facilitating spousal rollover of death benefits (if benefits are paid in a lump sum), (2) allowing a non-spouse beneficiary to receive MRD s over his/her life expectancy, (3) shifting investment and actuarial risk/reward from plan (or annuity provider) to owner, and (4) assuring any residual benefits are paid to a beneficiary designated by the participant (or the participant s beneficiary). For most QRP s, a spouse of a married participant must consent to any nonspouse beneficiary of the participant s death benefit. Spousal consent applies to any trust established for a surviving spouse (or any other beneficiary). Spousal consent must: Be in writing; Designate a specific non-spouse beneficiary (including any class of beneficiaries and contingent beneficiaries) that cannot be changed without spousal consent (unless spousal consent expressly permits a change without further spousal consent); Acknowledge effect of spouse s waiver; and Be witnessed by a plan representative or notary public. IRC 417(a)(2)(A); Treas. Reg (a)-20, Q&A 32. In the case of a trust named as beneficiary, a spouse is not required to consent to the beneficiaries of the trust or any later change to the trust beneficiaries. Treas. Reg (a)-20, Q&A 31(a). It is important to understand the spousal consent rules of the particular QRP. Spousal consent to a non-spouse beneficiary may be either general or specific. A general consent may allow later beneficiary changes without additional spousal consent. Consent may be irrevocable or not if not, a spouse may later revoke his/her consent. These issues will be governed by the terms of the particular plan involved. Treas. Reg (a)-20, Q&A 31(c). Spousal consent is not required if: No spouse Spouse cannot be located Spouse is incompetent Spouses are legally separated (living apart is not enough) Spouse has been legally abandoned. IRC 417(a)(2)(B); Treas. Reg (a)-20, Q&A 27. 3

5 However, there are no exceptions for an incarcerated spouse, a military spouse, an uncooperative spouse or a spouse living apart from the participant. Watch out: spousal consent cannot be satisfied by a premarital agreement. In other words, under ERISA a waiver of spousal benefits in a premarital agreement is, in itself, meaningless. Spousal consent is only valid after marriage. (Marital agreements almost always predate the marriage.) Spousal consent rules have been strictly enforced. See, Pedro Enterprises v. Perdue, 998 F.2d 491 (7 th Cir. 1993); National Automobile Dealers & Associates Retirement Trust v. Arbeitman, 89 F.3d 496 (8 th Cir. 1996); Hayward v. Newton, 282 F.3d 285, (4 th Cir. 2002). But see, Burns v. Orthotek, Inc. Employees Pension Plan, (2011, CA7) 2011 WL , where because of unusual circumstances the Court approved a spousal waiver although the consent was not witnessed by a plan representative. Spousal consent is not binding on a later spouse. Treas. Reg (a)-20, Q&A 29. In contrast, some courts have applied equitable principles to enforce a spousal waiver of benefits in divorce settlement agreements, despite absence of a formal QDRO. These equitable decisions generally do not extend to the enforcement of premarital agreements (absent spousal consent) and should not be relied upon in a divorce situation following Kennedy v. Dupont Savings and Investment Plan, 1295 S. Ct. 865 (2009). What to do if spousal consent cannot be obtained? In some cases, it may be possible for a participant to receive a lump sum distribution of benefits (either in-service or post-termination) from a QRP and rollover benefits to an IRA. This works for most DC plans, including 401(k) plans, if the QRP provides a lump sum distribution as the normal form of retirement benefit. The IRA may be a safe haven for designating a non-spouse beneficiary, since the spousal consent requirements generally do not apply to IRA s. 4. Minimum Required Distributions. The MRD rules govern (1) when benefit distributions must commence (both during lifetime and after death) and (2) the time period over which distributions must be made. In sum, these rules govern how quickly and how much benefits must be distributed from a QRP or IRA. MRD s must commence by April 1 of the calendar year after reaching age 70-1/2. However, an employee who is not a 5% owner can defer distribution from a QRP (but not an IRA) until April 1 of the year after the employee actually retires. IRC 401(a)(9)(C)(ii). Lifetime MRD s will be made based on the value of the benefits (i.e., account value) as of the prior December 31 multiplied by applicable divisor. Treas. Reg (a)(9)-5. At age 70, MRD s are calculated based on IRS projected life expectancy of 27.4 years. Treas. Reg (a)(9)-9. 4

6 An individual with a spouse more than 10 years younger may use a joint life expectancy based on IRS Joint and Last Survivor Table. This will allow a longer distribution period. An individual can receive MRD s from several IRA s by picking and choosing how much will be withdrawn from each IRA each year. This technique does not apply to a QRP. MRD requirements apply separately to each QRP. What happens when the owner dies? MRD requirements must be satisfied in the year of the owner s death. In effect, the MRD accrues on January 1 of each year. For year of death (when death occurs after age 70-1/2), MRD (or balance of MRD if a partial distribution has been made) will be made to the owner s designated beneficiary (or default beneficiary, if none). Unless the decedent s estate is his/her beneficiary, the MRD should not be paid to the decedent s estate. The MRD s which apply when death is before required beginning date (generally, age 70-1/2): A. If there is no designated beneficiary, then 5-year rule applies. B. If there is a designated beneficiary, then either 5-year rule applies or distributions may be made over life expectancy of designated beneficiary starting in year following owner s death. C. If spouse is beneficiary, then spouse may elect rollover treatment and start fresh. Alternatively, spouse may elect to start MRD s from deceased owner s IRA/QRP by the later of (a) December 31 of year after owner s death or (b) December 31 of year in which deceased spouse would have reached age 70-1/2. Unlike a non-spouse beneficiary, a spouse s life expectancy may be recalculated each year. Treas. Reg (a)(9)-3. The 5-year rule requires all benefits to be distributed no later than the end of year which includes the 5 th anniversary of the owner s death. IRC 401(a)(9)(B)(ii). The MRD s which apply when death is after required beginning date: MRD s must be made over the longer of (a) owner s remaining life expectancy, or (b) designated beneficiary s life expectancy. If there is no designated beneficiary, MRD s must be made over deceased owner s remaining life expectancy (based on Single Life Table) determined in year of death. 5

7 If designated beneficiary dies before all benefits are distributed, then MRD s must continue (presumably to successor beneficiary) at least as rapidly as while designated beneficiary was alive. Treas. Reg (a)(9)-5. Roth IRA s are subject to different MRD rules: No MRD s required during owner s lifetime After owner s death, normal MRD rules apply (5-year rule or MRD s over life expectancy of designated beneficiary). Treas. Reg A The Designated Beneficiary Issue. Without a designated beneficiary, post-death benefits are subject to the 5-year rule (if owner dies before age 70-1/2) and may not be recalculated based on the recipient s life expectancy (if the owner dies after age 70-1/2). A designated beneficiary is an individual identified as a beneficiary of the IRA or QRP as of September 30 following the year of owner s death. A designated beneficiary must be an individual: an estate, charity or cat will not qualify. Treas. Reg (a)(9)-4, Q&A 1, Q&A 3. One bad beneficiary taints all beneficiaries resulting in the absence of a designated beneficiary. Treas. Reg (a)(9)-4, Q&A 3. A trust is subject to a special look through rule (described below). Be sure to prohibit use of retirement benefits to pay estate obligations, such as estate taxes and expenses, to prevent the owner s estate from being treated as a beneficiary. 6. Trust as Designated Beneficiary. A trust may qualify as a designated beneficiary only if trust requirements and documentation requirements are satisfied. The trust requirements are: Only individuals are beneficiaries of trust; Trust must be valid under applicable state law; Trust must be irrevocable no later than owner s death; Beneficiaries must be identifiable under trust. Treas. Reg (a)(9)-4, Q&A 5. The documentation requirements are: the administrator of the QRP or the IRA custodian must be provided with a final list of all beneficiaries of the trust (including contingent and remaindermen beneficiaries, with a description of the conditions of their entitlement) as of September 30 of the calendar year following the calendar year of the owner s death, and certify that, to the best of the trustee s knowledge, the list of beneficiaries is correct and the trust requirements (described above) are satisfied, and agree to provide a 6

8 corrected certification in the future if any of the described information changes; or agree to provide a copy of the trust to the plan administrator upon demand or, instead, provide the administrator with a copy of the actual trust document of the trust that is named as a beneficiary of the benefits. Treas. Reg (a)(9)-4, Q & A 6. The following is a sample certification, which satisfied the documentation requirement: To: Bank ABC, as custodian of the Mary Smith IRA I, John Smith, not individually but as the successor trustee of the Mary Smith Revocable Trust dated January 1, 1990 (the Trust ) hereby states and certifies as follows: 1. Mary Smith established the Trust on January 1, The Trust is a valid trust under the laws of the State of Illinois. The Trust became irrevocable by reason of Mary Smith s death on January 1, To the best of my knowledge, the following persons are all of the beneficiaries of the Trust as of September 30, 2011: Name Birth Date Conditions to Receipt of Benefits Thomas Smith 12/1/70 None Susan Smith 12/1/75 None Mary Smith Marital Trust FBO John Smith 12/1/40* None *Marital Trust is considered a conduit trust under Treas. Regs (a)(9)-5. Therefore, the life expectancy of John Smith, the sole beneficiary of the Marital Trust, is used to determine required minimum distributions to the trust. 3. A true and complete copy of the Trust is attached hereto. 4. The undersigned shall provide an updated certification if any of the above information changes after the date hereof. Dated: October 1, 2011 John Smith, as trustee of the Mary Smith Revocable Trust Dated January 1, 1990 There is typically no issue as to whether a trust designated as beneficiary of a QRP or IRA is a valid trust under state law. Either a revocable trust (which is 7

9 irrevocable at death) or a testamentary trust will qualify. Treas. Reg (a)(9)-5, Q&A 7. Also, a trust treated as an estate by reason of an election under IRC 645 will qualify. 67 Fed. Reg , (April 17, 2002). A look through rule applies to trusts for MRD purposes. The life expectancies of the trust beneficiaries are used to determine the distribution period under the MRD rules. If there are multiple beneficiaries, the individual who is the trust beneficiary with shortest life expectancy (i.e., oldest individual) is used for MRD calculations. Treas. Reg (a)(9)-5, Q&A 7(a)(1). In applying the look through rule, the following steps are followed: first, identify trust beneficiaries who are potential beneficiaries of benefits. If any beneficiary of the trust eligible to receive the benefits is not an individual, either clean up the tainted beneficiary before the September 30 measuring date or comply with the 5-year rule. For example, an estate or a charity does not qualify as an individual. second, identify the beneficiary with the shortest life expectancy. Contingent beneficiaries must be considered. See PLR (April 18, 2002); Treas. Reg (a)(9)-5, Q&A 7, Example 1. Permissible appointees under a power of appointment must also be considered. See PLR s (June 4, 2002). Also, consider use of boiler plate fail safe language, such as follows: Notwithstanding anything to the contrary herein provided, the Trustee may (1) accelerate the distribution to any Disqualified Beneficiary (defined below) hereunder to a date prior to September 30 following the year of the settlor s death (the Measuring Date ), or (2) commute the interest of any Disqualified Beneficiary in any trust hereunder and, in so doing, distribute such commuted value prior to the Measuring Date. The term Disqualified Beneficiary shall mean any beneficiary who is (1) not an individual within the meaning of Code 401(a)(9) and the Regulations thereunder, or (2) an individual who is older than the oldest beneficiary under Section hereof who is living as of the Measuring Date. When can contingent beneficiaries be disregarded? Beware of the impact of contingent beneficiaries when analyzing trusts under the look through rule. Generally, contingent beneficiaries of a trust can not be disregarded. In contrast, mere potential successors to the interest of a beneficiary can be disregarded. It appears that contingent trust beneficiaries may be disregarded only when outright distributions are provided for. Treas. Reg (a)(9)-5, Q&A 7, example 1. Consider a typical scenario: Benefits are payable to a trust for a spouse s lifetime, with trusts for children as the remainder beneficiaries (after spouse s death). In this scenario, the contingent beneficiaries of the children s trusts (heirs-at-law, charities, etc) can not be ignored. 8

10 See PLRs and In contrast, if the contingent beneficiaries (after spouse s death) are the children outright, then you do not need to look beyond the children for other beneficiaries. A different rule applies to conduit trusts. Only the lifetime of the conduit beneficiary is used to determine MRD s. Treas. Reg (a)(9)-5, Q&A 7(c)(3), Example 2. A conduit trust is merely a pass-through vehicle. All benefits, including MRD s, are distributed through the trust directly to the beneficiary. Therefore, a conduit trust has few advantages as an asset accumulation vehicle (since all MRD s must be distributed to the beneficiary). However, with a conduit trust, if the surviving spouse is beneficiary (1) he or she can defer MRD until the IRA owner would have reached age 70-1/2, Treas. Reg (a)(9)-3, Q&A 3(b), and (2) the spouse can recalculate his or her life expectancy each year (rather than use the less one method), Treas. Reg (a)(9)-5, Q&A 5(c)(2). A conduit trust eliminates the need to comply with the complicated look through rule for trusts, including the complications caused by old or contingent beneficiaries under the trust. Sample language creating a conduit trust is as follows: Retirement Plan Benefits. If any individual retirement accounts shall be payable to a trust established under Sections hereof, then in addition to the foregoing, the Trustee shall withdraw from such individual retirement account each year the minimum required distribution for such account for such year, determined pursuant to Internal Revenue Service regulations as if the beneficiary of such trust was the designated beneficiary of such account. The Trustee shall forthwith distribute the entire amount of such minimum required distribution to the beneficiary of such trust, free of trust, it being the Grantor s intention that such trust shall constitute a so-called conduit trust under Treasury Regulations Section 1.401(a)(9)-5 for purposes of determining the length of the minimum distribution period for any such retirement account benefits. If separate shares for the benefit payments are created for each trust beneficiary, then each beneficiary s life expectancy can be used for each separate share for MRD purposes. See PLR However, payment of benefits to an umbrella trust which, in turn, is divided into sub-trusts for children or other beneficiaries will not allow use of different ages of each beneficiary for MRD purposes. 7. What are the Options? Some of the options for designating beneficiaries include: Surviving spouse Surviving spouse with a disclaimer allocation to a credit shelter trust or descendants A QTIP trust A credit shelter trust An umbrella revocable trust 9

11 Children or other individuals Charities Each of these choices will have different income and estate tax consequences. * * * Today, given a $5.0M estate tax exemption and portability between spouses, many clients will be able to designate a surviving spouse as the direct beneficiary of his/her benefits without federal estate tax complications. Historically, with a lower estate tax exemption (and no spousal portability), naming a spouse as a direct beneficiary often resulted in an overfunded marital deduction (and a larger estate tax at the survivor s death). Spouse as Direct Beneficiary: Advantages: Allows spousal rollover and fresh start with MRD, thereby deferring both estate tax and income tax Surviving spouse can defer MRD until deceased spouse would have reached age 70-1/2 (if surviving spouse is older than deceased spouse) Simplicity Presumably, a payment of benefits to a civil union partner will qualify for Illinois (but not federal) estate tax marital deduction Disadvantages: Surviving spouse controls the benefits, so not ideal for multiple marriage client or spendthrift spouse Benefits not available to fund federal or Illinois estate tax exemption Beware of premature distribution if surviving spouse needs to access benefits which are rolled over prior to age 59-1/2 No assurance surviving spouse will maximize MRD s to defer income tax Beware of over-funded marital bequest for Illinois estate tax purposes Spousal Disclaimer Option: The amount of the federal estate tax exemption in coming years may be a moving target the $5.0M exemption and spousal portability may no longer be the law after One way to address this uncertainty is by designating a surviving spouse as 10

12 primary beneficiary while naming a credit shelter trust (or descendants) as the contingent beneficiary. A disclaimer of the benefits by the surviving spouse will cause the disclaimed benefits to pass to the contingent beneficiary. The disclaimer strategy will allow the surviving spouse to make a post-mortem decision to either rollover the benefits to an IRA (and defer income and estate tax) or fund the exemption amount with some or all of the benefits. The IRS has recently ruled that MRD s paid to a surviving spouse for the year of death do not preclude the surviving spouse from disclaiming the balance of the deceased spouse s benefits. In effect, the IRS ruled that the MRD s were analogous to a separate pecuniary distribution from a larger bequest. PLR (June 24, 2011). A sample disclaimer beneficiary designation may be as follows: 1. Primary Beneficiary: Mary Smith (spouse)* 2. Contingent Beneficiary: Family Trust under the John Smith Living Trust dated January 1, 1990 *If the primary beneficiary, Mary Smith, shall partially disclaim her interest in the account, then the primary beneficiary shall be deemed to be deceased only as to the disclaimed portion of the account and shall be deemed to have survived me as to the non-disclaimed portion of the account. Advantages: Addresses uncertain tax rules by allowing post-mortem analysis of optimum income and estate tax result Disadvantages: A timely disclaimer requires compliance with several rigid tax requirements A disclaimer may require the surviving spouse to give up a power of appointment over the credit shelter trust A surviving spouse may be reluctant to exercise a disclaimer because of irrational non-financial factors The IRA custodian or QP administrator must understand and implement the disclaimer mechanics QTIP Trust as Beneficiary: Advantages; Disadvantages: 11

13 Allows owner/deceased spouse to control ultimate distribution of benefits Allows benefits to qualify for estate tax marital deduction May allow MRD over life expectancy of surviving spouse Beware of disparity between QTIP trust accounting income and MRD (taxable) income: All income requirement per Rev. Rul treats QRP/IRA as separate assets of QTIP trust. To satisfy marital deduction requirements, all income of QRP/IRA must be distributed to QTIP, even if greater than MRD (so income tax deferral on benefits is lost if income exceeds MRD). In turn, QTIP must distribute all trust accounting income to spouse. Be sure trustee of QTIP has absolute right to withdraw all income from QRP/IRA otherwise, all income standard may not be satisfied. Beware of states which have adopted Section 409 of UPIA (AZ, CA and MI). State law in these states distort definition of income from QRP/IRA and violate all income requirement. Section 409 of UPIA allocates 1) 10% of MRD to income, and 2) all other benefit distributions to principal. In effect, this deprives the surviving spouse of the income from the QRP or IRA. Beware of complications caused by disconnect between trust accounting income vs. taxable income concepts. MRD in excess of income of QRP/IRA gets trapped in QTIP. If not distributed to spouse, this portion of MRD may be subject to income tax at higher trust rates (vs. spouse s lower individual rate). Unless QTIP qualifies as conduit trust, remainder beneficiaries must be considered under look through rule. Revocable Trust as Beneficiary: 12

14 Advantages: Allows use of benefits to fund credit shelter trust (if needed) Beneficiary designation should work regardless of whether other spouse survives Can allow spousal rollover of benefits if trust provides for outright marital gift (no marital trust) and directs trustee to use benefits to fund marital share Disadvantages: Must use a fractional marital formula (with hassle of fractionalizing all assets to fund residuary testamentary gifts) Must assure revocable trust is a valid designated beneficiary. Under look through rule, be sure (1) benefits can not be used to pay estate expenses and taxes, (2) no trust beneficiary who is too old, and (3) no non-individual trust beneficiary. If descendants are expected beneficiaries of benefits, prevents use of separate shares to determine MRD for children or other descendants. Credit Shelter Trust as Beneficiary: Advantages: Funding of estate tax exemption at first death may reduce aggregate estate taxes. MRD based on oldest beneficiary of credit shelter trust (typically the surviving spouse.) Can use post-mortem spousal disclaimer to fund credit shelter trust on an as needed basis. Disadvantages: Requires MRD to begin to credit shelter trust in year following death this may accelerate distributions (vs. spousal rollover). Benefits are not ideal asset to fund credit shelter trust, since QRP/IRA benefits come with an income tax liability. If paid by credit shelter trust, the income taxes on MRD will waste trust assets and reduce potential estate tax savings. If MRD s are distributed from credit shelter trust to surviving spouse, spouse s estate will be increased by net MRD s. Payment of Benefits Directly to Children or other Individual(s): 13

15 Simplicity. Advantages: Effective for distributions after 2009, all QRP s offering a lump sum death benefit must allow a non-spouse beneficiary to rollover benefits to an IRA (which is treated as an inherited IRA ) Do not have to satisfy look through rule for trusts. Can use life expectancy of individual beneficiary to determine MRD. Each beneficiary can treat his/her portion of IRA as a decedent s IRA. This allows each beneficiary to control investments, pick managers and exercise discretion over withdrawals (subject to MRD rules). Disadvantages: Beneficiary may elect to withdraw entire benefit immediately. No trustee management/oversight over assets. Beneficiary of benefits may, in turn, designate their own beneficiary of remaining benefits at death owner loses control over ultimate distribution of benefits. Case law may not provide creditor protection for beneficiary of an inherited IRA. Generally, individual beneficiary may be in a lower income tax bracket than trust. Charity as Beneficiary: Advantages: No income or estate tax on benefits the tax problem is eliminated. If client is charitably inclined using benefits may be cheaper way to fund gifts If paid to a private foundation, benefits will not be considered net investment income subject to 2% excise tax Disadvantages: If non-charitable beneficiaries are also named from a single IRA, then charitable beneficiaries must be paid out before September 30 identification date otherwise, there will be no designated beneficiary of IRA Do not use QRP/IRA to fund pecuniary charitable gifts through a revocable trust since trust will pay income tax on IRD used to fund pecuniary bequest Unless charitable gift is a specific dollar amount from IRA, the amount passing to charity will be unknown (since IRA 14

16 account balance will be continually increased by income and appreciation and decreased by depreciation and MRD s) 15