Leave a Legacy for Tomorrow
By Mark W. Curnutte

Have you ever thought about leaving money to provide annual scholarships for law students or financial support for the mock trial program? Maybe you simply like the idea of establishing a permanent named endowment fund to further the general charitable purposes of the Oklahoma Bar Foundation. Ever thought about how you could designate a portion of your estate to the OBF to accomplish these purposes? Others have done it.1 Naming the OBF as a beneficiary of your traditional IRA or qualified retirement plan can be a tax-efficient way to fund your charitable bequest. With proper planning, everybody wins except the IRS.

Tax Advantages. Traditional IRA2 and retirement plan death benefits are generally subject to income tax when received by a family member or other individual beneficiary. However, the OBF can receive those same benefits without paying any income tax because the OBF is a tax-exempt public charity. The participant’s estate will be entitled to claim an estate tax deduction for the charitable bequest or gift3, and the OBF will receive the entire amount of the IRA or plan distribution undiminished by income or estate taxes. A family member receiving the same distribution would keep only the net amount remaining after payment of taxes.

1. Example4: Mike wants to leave half of his $1.2 million estate to the OBF, and half to his niece Krista. Mike’s assets are: a $600,000 IRA and $600,000 cash. Krista is in the 40 percent income tax bracket. If Mike leaves half of each asset to Krista and half to the OBF, Table 1 shows what each receives.

If Mike leaves the entire IRA to the OBF and all of the cash to Krista, the beneficiaries would receive the amounts shown in Table 2.

In the example, the OBF receives the same amount under either approach, but Krista receives an extra $120,000 in the Table 2 example because Mike named the OBF as the beneficiary of the entire IRA. In either case, Mike’s personal representative would be entitled to claim the charitable bequest as a deduction on Mike’s Oklahoma estate tax return, saving even more tax. Everybody wins except the taxing authorities in this example.

Don’t Mess It Up. Using a traditional IRA or qualified retirement plan to fund a charitable bequest at death can be a bit tricky from a tax standpoint. If you want to enable family members to “stretch out”5 their share of the distributions made after your death for as long as possible, consider these recommendations:

1. Name OBF as the only beneficiary. One way to preserve the ”stretch out” for family members is to name the OBF as the sole beneficiary of the entire balance of one of your retirement accounts, and name family members as beneficiaries of your other retirement accounts. If the value of your account is greater than the amount you desire to leave to the OBF, consider splitting the account into two separate accounts, naming the OBF as sole beneficiary of one and family members as beneficiaries of the other.

2. Satisfy the “separate account” rule.6 If splitting the IRA or qualified retirement plan into separate accounts creates too much paperwork, then designate the OBF as beneficiary of a fractional or percentage share of the account. For example, name the OBF as a 25 percent beneficiary, and designate 75 percent of the account to go to designated family members.

3. Pecuniary Gift to OBF. Problems may arise if you leave a specific pecuniary amount (e.g. $50,000) of your IRA or retirement plan benefits to the OBF, and the balance of the account to family members. If you are unable to convert a pecuniary gift into a fractional gift to satisfy the separate account rule, then be advised that the pecuniary distribution to the OBF must be made by no later than Sept. 30 of the year following the year of your death7, otherwise the tax benefits associated with the “stretch out” of distributions to family members may be lost. A fractional gift that satisfies the separate account rule is the better (safer) approach.

4. Be careful if using your trust. If you name your revocable trust as beneficiary of your IRA or qualified retirement benefits, and you name the OBF as a beneficiary of your trust, there are additional tax traps to be avoided. These tax traps are beyond the scope of this article. Consult with your tax adviser or purchase and study Natalie Choate’s book, Life and Death Planning for Retirement Benefits (5th Edition, 2003 revised).8

Get It Done Now. There never seems to be enough time for lawyers to do their own estate planning. For most of us, it is a chore placed on the back burner far too long. Naming the OBF as a beneficiary of your IRA or qualified retirement plan can be a tax-effective way for you to benefit the legal profession for years to come. Why not leave a legacy for tomorrow?

1 . Go to www.okbar.org/obf for more information regarding the OBF and the various endowment funds administered by the OBF.
2 . Roth IRA distributions are generally not subject to federal income tax, and there is no income tax advantage to leaving such benefits to charity. On the other hand, leaving traditional IRA benefits, as well as benefits from qualified retirement plans and 403(b) arrangements, can be an excellent tax planning strategy.
3 . See Section 2055 of the Internal Revenue Code of 1986, as amended (“Code”), and Okla. Stat. Tit. 68, Section 808.
4 . The examples shown in Tables 1 and 2 were borrowed from Natalie Choate’s book, Life and Death Planning for Retirement Benefits, 5th Edition, 2003 revised. The examples do not take into account or reflect the Oklahoma estate tax payable with respect to Krista’s share.
5 . Keeping retirement benefits inside an IRA or qualified plan for as long as possible allows the investment to grow tax-free. However, distributions must eventually be made pursuant to “minimum distribution rules” set forth in Section 401(a)(9) of the Code. These rules dictate when and how fast distributions must be made. Using the minimum distribution rules in an advantageous manner allows the benefits to remain inside the account or plan and the distributions to be continued or “stretched out” after the participant’s death for the longest time allowed by law, thereby deferring the income tax on the distributions.
6 . See Treasury Reg. § 1.401(a)(9)-8, A-2, A-3.
6 . Sept. 30 of the year following the year of the participant’s death is sometimes referred to as the "Designation Date". See Treasury Reg. § 1.401(a)(9)-4, A-4.
8. Visit Natalie Choate’s Web site www.ataxplan.com for more information.

Mark W. Curnutte is an attorney with the Logan & Lowry Law Firm in Vinta.