What is an IRA? Part II

Last time, we looked at how the term IRA is defined; who can establish a brand new IRA; and the definition of the term “inherited IRA”.

Now we dig deeper into the concept of an inherited IRA. We’ll do this using a real-life example of an individual beneficiary. Later we’ll look at a real-life example of a charity beneficiary.

Dad dies, having named Daughter as beneficiary of his IRA. Daughter becomes an IRA beneficiary upon Dad’s demise. Daughter has inherited Dad’s IRA. Dad’s IRA is now an inherited IRA. Dad is still the named owner of the IRA, and the IRA bears Dad’s name.

The custodian (= trustee) of Dad’s IRA is financial institution A. Daughter handles all of her financial business at financial institution B. Daughter wants to get the money Dad left to her housed in an IRA (which is exempt from tax) at B.

Daughter does this by setting up at B what the IRS calls a “beneficiary IRA”. The beneficiary IRA is set up in Dad’s name for the benefit of Daughter. It bears Daughter’s tax ID #. Now, a tax-free trustee-to-trustee transfer is made from the inherited IRA at A to the beneficiary IRA at B.

This series of moves is not spelled out in the tax law. The IRS has simply said, but not in a way that constitutes tax law, that this series of moves is permitted. Odd, huh?

There’s a lot more to say next time. Before we stop for now, however, note that once Daughter attains 70.5 years, she can begin making IRA rollover gifts to charity out of her beneficiary IRA. That’s pretty cool.

Click here to read Part III.

by Jon Tidd, Esq

What is an IRA?

It’s good to know what an IRA is, given that so much money comes to charities from IRAs.

An IRA is defined in the Tax Code as:

  • a trust
  • established in the U.S.
  • for the benefit of an individual or his/her beneficiaries
  • that meets certain requirements (e.g., is prohibited from investing in life insurance).

That’s pretty straightforward, but the waters run deep here.

For example, who can establish a brand new IRA? The answer is:

  • an individual,
  • an employer (for the benefit of its employees), or
  • an association of employees (for the benefit of its members.

The type of IRA encountered in gift planning is almost always (if not always) an IRA that has been established by an individual.

What happens if the individual who has established an IRA dies?

If there is no named IRA beneficiary, the individual’s estate becomes the beneficiary…not a good situation, because the individual’s estate generally will owe income tax on the IRA money it receives.

If there are one or more named beneficiaries, they are said to inherit the IRA, and the IRA is now an “inherited IRA”. Both individuals and charities can inherit an IRA.

We should stop here and pick up next time. We’re about to enter some very interesting territory, which will involve some fairly deep digging.

Click here to read Part II.

by Jon Tidd, Esq

A CRT Paying Into a Second Trust — Part II

Last time, we looked at the idea of a CRT paying into a second trust. We focused on an example of a charitably motivated parent who wants to provide support for his 49-year-old disabled son.

The plan we examined was a 20-year term-certain CRT paying into a second trust that was to provide for the son, who we assumed has a diminished future lifespan.

Let’s now assume the son has a normal future lifespan, expected to be another 30 to 35 years.  Now the idea of a 20-year CRT doesn’t work.

What about a CRT paying into a second trust for the son’s life?

We need to consider several things:

  • This CRT may not provide a great benefit to the charitable remainder beneficiary, because of the son’s young age.
  • Depending on the IRS discount rate, a CRAT may not work, because of the 5%-probability test. A CRUT may have to be employed.
  • The idea of a CRT paying to a second trust for the life of the son works only if the son is truly incapacitated. There’s an IRS ruling on this point.
  • If a CRT pays to a second trust for the life of an individual, any assets remaining in the second trust at the death of the individual must be paid to the individual’s estate.

That’s a bunch of complex planning considerations.

If you run into this sort of situation, you and the donor are going to need expert advice. The donor will need to have expert legal counsel.

by Jon Tidd, Esq

A CRT Paying Into a Second Trust

Sometimes in charitable gift planning it’s necessary to design a gift plan to meet complex donor objectives.

For example: Donor wants to benefit CHARITY A and also provide an income for his son. The problem is that the son is only 49 years old and is severely disabled with a birth defect.

If Donor is thinking of a six-figure or larger gift, a charitable remainder trust (CRT) may make sense. But the CRT can’t, as a practical matter, pay directly to the son.

Let’s assume the son’s physician doesn’t expect the son to live more than another 20 years. In the real world, this simplifying diagnosis may not exist very often, but it does simplify our planning somewhat.

It leads to the idea of creating a 20-year term-certain CRT that will make its payout to a second trust. The second trust will be fashioned as a special needs trust to provide for the son. Great latitude will be allowed in designing the second trust; and its design will require an expert — perhaps an elder care lawyer steeped in designing special needs trusts.

There are several things to consider here:

  • The second trust will be a taxable trust. The waters here can run fairly deep; and the services of a lawyer who is an expert in taxable trusts may be needed.
  • The CRT can be designed to terminate on the son’s death if the son dies before the end of the 20-year term.
  • The remainder interest in both the CRT and the second trust can be given to CHARITY A.

There’s more to consider in dealing with the situation presented.

We’ll continue with this situation next time.

Click here to read Part II.

by Jon Tidd, Esq

A Real Estate Matter

Lots of individuals have used real estate to make charitable gifts. The question for today is, when is the gift deemed made?

To keep things simple, let’s assume:

  • the real estate is environmentally clean undeveloped land;
  • the donor holds legal title to the land (i.e., the land isn’t held in a corporation, LLC, or other entity);
  • there’s no mortgage or other debt;
  • there is no wetlands problem, no spotted owls, etc.; and
  • the land is readily marketable.

Let’s assume further that the individual holding legal title to the land wants to use it to create a flip unitrust.

Basically, to create the trust, what the donor needs to do is execute a flip unitrust agreement and then deed the real estate to the trustee of the unitrust.

Simple, right? Well, yes, but what if the deed conveying legal title to the trustee is never recorded?

The question becomes, at what point in time is the land transferred into the trust? Transferred for federal income tax purposes. This point in time is when the charitable gift is made.

The answer is, it’s not clear…at least to me. Here’s why. At common law, title to real estate is transferred when the deed is delivered to the grantee (the grantee is the purchaser, the donee, whoever is the intended new title holder). The argument under common law, therefore, is that the transfer of title to the trustee of the flip unitrust occurs when the deed is delivered to the trustee.

The problem with this argument from a federal tax standpoint is that until and unless the deed is recorded, the trustee’s title can be defeated by someone who pays to buy the same land from the same donor if the buyer has no actual knowledge of the prior delivery of the deed to the trustee.

The situation here is a mess. If you get involved in a situation like this, be sure to contact your SHARPE newkirk consultant and competent legal counsel.

by Jon Tidd, Esq

What to Do When the Donor Dies

Planned giving officers must at some point deal with death and the emotional, legal and financial issues that arise when a donor passes away. The March/April 2019 issue of Give & Take features a panel discussion with me and my colleagues, Laura Knitt and John Jensen, on some of the most commonly asked questions we get regarding estate settlement. For more detailed coverage of this issue, here are links to each article from a six-part series I wrote for Give & Take in 2012.

Part One: What to Do When a Donor Dies

Part Two: Memorial Gifts

Part Three: Understanding Estate Administration Rights and Responsibilities of Charitable Beneficiaries

Part Four: Check the Numbers

Part Five: Collecting Gifts From Retirement Plans, Insurance, Pay-on-Death Accounts and Life Income Arrangements

Part Six: Sticky Issues

If you have estate settlement questions you’d us to address on this blog, please email info@SHARPEnet.com with “estate settlement” in the subject line. We may address your concern in a future blog post.

By Aviva Shiff Boedecker, SHARPE newkirk Senior Consultant

Let’s Look at a Proposed CRAT Amendment — Letter Ruling 200010035


  1. Some time ago, H and W established a CRAT of which they are the trustees.
  2. The remainder beneficiary of the CRAT is H and W’s private foundation.
  3. The assets of the CRAT have grown to the point where they’re way more than needed to support the annuity payments to H and W.

What H and W Want to Do

H and W want to amend the CRAT so that excess trust income will be distributed each year to the foundation; also, so that they, as trustees, will have the discretion to distribute trust principal from time to time to the foundation.

  • Any principal distributions will be such that at least “$X” of principal will remain in the trust — $X being plenty enough (according to the ruling) to support the annuity payout.
  • The amendment, therefore, will not affect the actuarial value of the annuity payout.

The Ruling

  1. IRS gives a green light to the proposed amendment.
  2. But IRS says H and W won’t get any federal income tax charitable deduction as a result of the amendment.

Note This

Any principal distributions must be fairly representative of the basis of all assets available for distribution on the date the assets are distributed.


This is a great little ruling. “Little” because it’s a private ruling, which means only H and W can rely on it. “Great” because it shows how to turn an existing CRAT into a current gift plan.

Although private, the ruling makes sense and therefore serves as a guide post.

by Jon Tidd, Esq

Tax Rules in Charitable Gift Planning

Donor wants to establish a gift annuity with appreciated stock but doesn’t know her cost basis in the stock. – The rule here is simple. If a taxpayer doesn’t know the basis of an asset he or she owns, the basis is zero for federal tax purposes.

Donor wants to contribute a life insurance policy on which there is a policy loan. – The rule here is that the contribution will be a bargain sale. Donor will be deemed to be paid an amount equal to the policy loan. That will (almost assuredly) cause Donor to realize ordinary income under the bargain sale rules.

Donor wants to contribute timber that is growing on land Donor owns…just the timber. – The rule here is that if the growing timber is a separately conveyable asset under local law, Donor can get a federal income tax charitable deduction for his gift. No deduction will be allowed if the growing timber is considered under local law to be part of the land on which it’s growing and is not separately conveyable. “Local law” means the law of the state where the land is located.

Donor wants to transfer a valuable musical instrument to a charitable remainder annuity trust. – There are two rules here. The first is that Donor’s federal income tax charitable deduction will be postponed until the CRAT sells the musical instrument.  The second is that the sale by the CRAT will be an unrelated use of the musical instrument, which means that Donor’s charitable deduction will be figured on her basis in the instrument.

Donor wants to make a gift to a university that will benefit members of a particular religion. – The rule here is that to be safe, Donor should express in the gift agreement a preference and not a command. A preference allows the donee organization to select a member of the religion from a group of otherwise equally qualified candidates. A preference also allows the donee organization to make an award to a member of the candidate group who does not belong to the particular religion if the group does not contain any members of the religion.

There are lots of other tax rules that can come into play in charitable gift planning. The rule here is, proceed with caution.

by Jon Tidd, Esq

Charitable Gift Planning Q&A

1.  Must the books kept by the development office and by the business office be identical?

No, and they shouldn’t be. Business office accounting is governed by FASB. FASB has nothing to do with development office counting, crediting, and recognition.

2.  Is it OK to provide in a naming-gift pledge agreement that the pledge is not legally enforceable?

Generally speaking, yes. But be sure to check applicable state law. Naming-gift pledges are ordinarily enforceable as contracts. Negating the contract may be desirable, for example, if the donor might want to use her private foundation to pay part of the pledge.

3.  Are DAFs subject to the same tax rules as private foundations?

No, but there are some similarities. For example, the self dealing prohibition applies to private foundations but not to DAFs. Nonetheless, a DAF can get into trouble with the IRS if it uses its assets for the benefit of its creator, such as tickets to a banquet or special event.

4.  Can a CRT be set up to run for the life of a pet?

Strictly speaking, no. But there’s a way to do it. The CRT is set up to run for a term of years (or a human life); and the trust agreement contains a qualified contingency…causing the trust to terminate earlier than normal upon the death of the pet.

5.  Can an individual who creates a CRT give some third party (say, his daughter) the power to shift the CRT remainder from one university department to another?

Yes, through a provision in the CRT agreement. The power can be made exercisable upon the donor’s death, for example.

6.  Can a charity receive part of the payout from a newly established CRT?

Yes. The charity is named as a payout recipient. It can’t receive the entire payout; and no charitable deduction is allowed for naming a charity to receive part of the payout.

7.  Are old U.S. coins given to charity money or tangible personal property?

Tangible personal property if the donor claims a value in excess of face amount.

by Jon Tidd, Esq

Let’s Talk About Worthless Gifts

For example, a charitable remainder unitrust set up to run for the life of an individual aged 50.

Some charities have gift acceptance policies that are questionable when it comes to minimum ages for certain “life income” gift plans. Age 50 is way too young for a CRUT other than a term-of-years CRUT. Age 60, in my opinion, is way too young for a gift annuity.

The 50-year-old’s unitrust is worth less to the remainder beneficiary because the present value of the right to receive assets upon the death of an individual currently aged 50 is negligible.

But we’ve got to be careful. There might be extenuating circumstances. For example, the payment recipient may be an individual of special needs, whose projected future life span is truncated. Or the donor — let’s say the recipient’s elderly parent — may have included the charitable donee for a generous bequest under his or her will. In this second situation, it may be important to accommodate the elderly donor.

Worthless (or at best, speculative) gifts often crop up in the context of a capital campaign. For example, CHARITY is doing everything it can to reach its campaign goal; the campaign has two years to run. DONOR approaches CHARITY with this proposition: Donor and others plan to construct an income-producing building. After 12 years, Donor says, Donor will “give the building” to CHARITY.

Perhaps this is a pretty tempting offer from a campaign-counting standpoint (it’s a great opportunity to fudge some numbers). But what’s the real worth today of a building that may, or may not, wind up in CHARITY’s hands 12 years from now? Your guess is as good as mine.

Keep in mind here that it appears the building will be held by a partnership (or some other entity), of which various investors will be owners. Donor only can give what he owns, which well may be a small slice of the pie.

If you’re dealing with a potentially worthless gift, your SHARPE newkirk consultant can help you consider the pros and cons of a particular gift situation.

by Jon Tidd, Esq