Posts Tagged ‘charitable gift’

IRA Beneficiary Designation Raises Ambiguity About Intent

JANUARY 6, 2014 VOLUME 21 NUMBER 1

Here’s an estate planning question we get asked a lot: if you have created a revocable living trust and transferred essentially all of your assets to the trust’s name, should you also make the trust beneficiary of your IRA, 401(k) and other retirement accounts? It’s a great question, and difficult to answer without referring to your own situation. Does your trust  continue for the benefit of children or grandchildren? Are there charities named as beneficiaries in your trust? Are you single? If you are married, is the trust a joint trust between you and your spouse? Do you have an estate large enough to be taxable? Are your children about the same age, or is there a significant age span among them? Are they going to receive your estate in equal or unequal shares? All of those questions and a few more are important when deciding whether to make your trust the beneficiary of your IRA.

We were thinking about this issue while reading a recent case decided by the Arizona Court of Appeals. It involved a substantial IRA and a change in the precise language of the beneficiary designation shortly before the owner’s death. The case ultimately turned on the evidence of the owner’s actual intention, but the unintended ambiguity introduced in the beneficiary designation should give every IRA owner (and every estate planner) pause.

Frank Merriwether (not his real name) married Melissa late in life, after the death of his first wife. Melissa died, tragically, of breast cancer just five years after their marriage. Frank wanted to leave something to the Arizona Cancer Center in Tucson, hoping that research into breast cancer causes and treatment might make a difference in the future.

Frank and Melissa had established a joint trust which, upon Melissa’s death, divided into two separate trusts. One, the “Survivor’s Trust,” could be amended by Frank. If he did not amend it, the Survivor’s Trust indicated that fixed dollar amounts would be divided among several recipients, including $100,000 to the St. George Antiochian Orthodox Church. After those specific distributions, the residue of Frank’s share of the trust would be distributed to a “Charitable Trust” described in the trust document — a trust set up as charitable lead trust.

Shortly before Melissa’s death, Frank changed the beneficiary designation on his IRA account to name Melissa as first beneficiary, and the “[Merriwether] Charitable Trust as specified in [the trust document]” as contingent beneficiary. After Melissa’s death, he changed the beneficiary designation to the “[Merriwether] Charitable Trust as specified in para 8 of [the trust document].” Part of his thinking, according to the financial adviser who handled his IRA, was that he could make future changes in the beneficiary designation by amending his trust, without having to fill out the paperwork with the stock brokerage acting as IRA custodian.

A few years later Frank’s financial adviser changed firms. As part of the shift to the new brokerage company, Frank’s beneficiary designation was changed to the “charitable organizations as called out in the [Merriwether] Survivors Trust UAD 6-1-2005.” That, according to Frank’s stockbroker, was intended to refer to the charitable trust in Frank’s trust document, and to, again, allow him to make beneficiary changes without having to fill out the beneficiary designation form. Shortly after that form was completed, Frank amended his trust to make the Arizona Cancer Center the sole beneficiary of the charitable trust. Frank died just six weeks later.

As successor trustee of the trust, Frank’s nephew made a distribution of $100,000 to the St. George Antiochian Orthodox Church. The Church, however, argued that it was one of the “charitable organizations as called out in the” Survivor’s Trust, and should share in part of the rest of the distribution. The trustee disagreed, and the dispute went to court.

The trial judge ruled that the beneficiary designation was ambiguous, and that it could consider other evidence of Frank’s intention in deciding what the designation meant. With the testimony of his stockbroker, it was clear that Frank intended the money to go to the Arizona Cancer Center, and the judge ordered the trustee to follow his wishes. St. George Antiochian Orthodox Church appealed.

The Arizona Court of Appeals upheld the trial judge. The appellate judges agreed that the evidence of Frank’s intention was clear, after consideration of his stockbroker’s testimony. The only real question was whether it was permissible to consider that evidence. The general rule of law, ruled the appellate court, is that you look only to the written documents to determine intent — unless the evidence is ambiguous, in which case you can consider other evidence. In this case, the language of the beneficiary designation created an ambiguity that permitted the stockbroker to explain Frank’s wishes. The church lost, and was even ordered to pay a portion of the University of Arizona’s legal fees. In the Matter of the Estate of Maynard, November 21, 2013.

We always try to extract deeper meaning from the appellate cases we describe. Is there a broader lesson for someone in Frank’s position, or for the stockbroker, or for the lawyer (we can only assume that a lawyer was involved) who prepared Frank’s estate plan? Perhaps we can suggest a couple of points:

  1. When changing beneficiary designations — even if it is a simple change occasioned (as Frank’s was) by a change from one IRA custodian to another — it might make sense to send the new beneficiary designation to your lawyer for review and suggestions. Frank’s earlier beneficiary designations looked much better than the final one, and his lawyer might have made a simple suggestion that could have saved tens of thousands of dollars in legal fees.
  2. When naming a trust as beneficiary of an IRA, it is easier if you can name the entire trust, perhaps like this: “The Jones Family Trust Dated ______, as it may be amended from time to time.” Of course, that wouldn’t have accomplished Frank’s intention. If a sub-trust of the Jones Family Trust is being named as beneficiary, it makes sense to give it a name in the trust document and then refer to that name. That’s essentially what Frank’s first beneficiary designation did, and the second one was even better.
  3. When you are leaving a substantial IRA to a sub-trust, you might consider creating a separate, stand-alone trust. If, for example, Frank had created the Merriwether Charitable Trust Dated ____, his main trust could then have left a share to that trust — and his IRA beneficiary designation could have named that separate trust, leaving no room for ambiguity.

Of course, all of this assumes that it is appropriate to name the trust as beneficiary of the IRA in the first place, and that isn’t always the case. That takes us back to our opening observation — this question is very fact-specific, and be very careful about how you handle beneficiary designations.

Gift Tax Limit Will Rise to $14,000 in 2013

NOVEMBER 19, 2012 VOLUME 19 NUMBER 42
Here’s the headline: the annual gift tax exclusion amount, which has been set at $13,000 per year since 2009, will increase next year by $1,000. That means you can give up to the higher figure ($14,000) to any one other person without having to file a federal gift tax return.

This confuses people, though it’s not really that complicated. Let’s take a shot at simplifying it.

The U.S. government imposes a tax on substantial gifts. It does that partly to protect the estate tax — if it was easy to just give away all your assets during your life, no one would ever be liable for an estate tax. But the government is not interested in making everyone file gift tax returns for the wool stocking cap and slippers you plan on giving your aunt for Christmas this year, so it has a threshold amount it ignores. In fact, that amount was well over the stocking cap and slippers in 1997, the last time Congress tinkered with it.

That year you could give $10,000 in a year. Your spouse could give another $10,000 (in fact, you could give $20,000 and just say half was from your spouse). Congress decided that figure ought to be adjusted each year for inflation, but no one relished having to remember that in 1998 the figure was $10,257 or some such number — so they set it to increase only in $1,000 increments. The first time it actually increased (to $11,000) was in 2002. It’s been at $13,000 since 2009, and next year it will go up to $14,000.

Here’s the confusing part, at least for most people: it doesn’t mean that you can’t give more than $14,000 (next year) to someone. It doesn’t even mean that you’ll pay a tax if you do. It just means that if you give more than $14,000 to one person, you will have to file a gift tax return. No tax will be due until the total amount of gifts in your lifetime exceeds — well, this is another confusing part of the story. Let’s just say, for now, that all the gifts in excess of the applicable annual exclusion amount each year must total $1 million over your lifetime before you owe any gift tax.

You may have read that the actual figure for 2013 (the amount you have to give away, in excess of your annual exclusion amounts) is $5.12 million. That figure is scheduled to revert to $1 million next year. Nearly everyone who follows these things expects Congress to change the $1 million figure to something larger, though it is unclear what the final figure might be. No one is sure when that change will be finalized, though few expect Congress to act before December 31 of this year.

Does that mean that the $14,000 figure is unsettled? No, it does not. This scheduled increase in the annual gift tax exclusion amount is independent of the tax cuts scheduled to expire next year, and is unlikely to be changed by Congress even if it does act on the larger tax questions.

Many people, and many tax advisers, have counseled wealthy individuals that they ought to consider making substantial gifts before the scheduled reversion to (approximately) 2002 tax levels. For people worth substantially more than $1 million, and especially for those worth well over $5 million, that is probably good advice. But for most people, the increase in the gift tax exclusion figure — the new $14,000 number — is actually more important. It allows the modestly wealthy to make larger lifetime gifts without worrying very much about gift taxes or the prospect of estate taxes.

Let us assume, for a moment, that you are in your sixties or seventies, that you have three adult children and six grandchildren, that you are married, and that you and your spouse are worth $1.5 million. Should you hurry and give away most of your money before the end of 2012? Probably not, as you are likely to be uncomfortable with the prospect of not having complete control over your money for the next decade or two.

That is especially true starting next year, when you and your spouse can give $28,000 per year to each of your children (and, if you are so inclined, another $28,000 to each of their spouses). On top of that, you can give $28,000 to each of your six grandchildren each year. If you feel the need to reduce the size of your estate to below the $1 million taxation level, you can give away over $250,000 without even having to file a tax return — much less pay any tax. You have quite a few years left to accomplish that goal, and you can probably wait to see what Congress does before making any rash decisions.

Your circumstances will almost certainly vary, of course, and that is what good legal advice is all about. You should discuss your individual situation with your estate planning attorney to determine the best course of action for you. But the increase in the annual gift tax exclusion amount gives you just a little more flexibility as you make your plans.

There are at least two other points we should make about the gift tax rules before we leave the subject:

  1. Arizona does not have a gift tax (or, for that matter, an estate tax) at all. If you live and die in Arizona, and all your property is here, you simply do not have to worry about state taxes on the transfer of your wealth to your children or other beneficiaries.
  2. The gift tax exclusion is not the only way you can make tax-free gifts. You can also pay for medical and education costs (you have to pay directly, not just make a gift to one of your children earmarked for college, for example). You can also make charitable gifts without worrying about the limit (your charitable gifts may also give you some income tax breaks, but that is a completely different story).

We hope that helps you understand the gift tax system. We plan on providing updates on the estate tax changes we expect to see over the next few months; stay tuned for the next wave of complications. But we think it pretty likely that this small scheduled change will actually be more important to most readers than what Congress does with the estate and gift tax system.

Pension Protection Act of 2006 Includes Little-Known Benefits

NOVEMBER 13, 2006  VOLUME 14, NUMBER 20

Even as the recent national election was ramping up late last summer, Congress passed and the President signed the Pension Protection Act of 2006. Billed as a great boon to most workers, the Act may not have nearly the advertised effect—primarily because of a continuing shift away from traditional “defined benefit” pension plans and toward “defined contribution” retirement arrangements. Still, there are a number of items every worker should know about—particularly those invested in IRAs and 401(k) plans.

The new law may actually accelerate the trend away from defined benefit retirement plans. Because it requires companies to use stricter accounting standards in calculating the amount of money required to fully fund such plans, many analysts predict that more employers will review their existing plans and instead move toward pension plans that create a separate account for each worker, with no guarantee of retirement income levels.

For those with existing 401(k) and IRA retirement accounts, however, the new law provides a small handful of new options. Among the benefits offered to those workers and their beneficiaries:

  • Even before the new law you could withdraw money from an IRA or Roth IRA, then make a charitable gift and deduct the gift for income tax purposes. You might not, however, be able to deduct the entire gift—meaning you would pay taxes on income that you are giving away. The new law lets you give instructions for a distribution directly from your IRA or Roth IRA to a charity with no tax effect at all, ensuring that you get the entire benefit of the charitable gift. Two limits: the maximum amount you can direct to charity is $100,000, and you only have tax years 2006 and 2007 to make the gift.
  • If you are the beneficiary of an IRA, 401(k) or other qualified plan, you can direct that the plan’s contents be rolled over into an “inherited” IRA. That means you will not be stuck with the plan’s rules about distributions (some plans do not allow withdrawals over your life expectancy, for instance, even though the tax laws permit such “stretch” distributions).
  • The Treasury Department has been ordered to issue new, liberalized rules on hardship withdrawals from 401(k) accounts. The new rules should make it easier to withdraw money for the benefit of not only the account owner, but also persons listed as beneficiaries under the plan.
  • It will be easier to roll 401(k) money over into a Roth IRA—though the tax will still have to be paid in the year of the conversion. Under old rules, the rollover required two steps (401(k) to IRA, then to Roth IRA).
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