In the fifth part of this series, Sharpe Senior Consultant Aviva Shiff Boedecker discusses the ins and outs of gifts received at death from sources other than bequests—and what to do when things don’t go smoothly.
An important advantage of gifts of the remainders of retirement plans and pay-on-death (POD) accounts, and death benefits of annuity and insurance policies is that they are convenient and flexible for the donor and relatively easy for the recipient organization to administer.
Collecting the proceeds of these gifts when the donor passes away should be fairly straightforward:
- Submit a certified copy of the death certificate to the company or plan administrator.
- An authorized representative of the charity will need to sign the required forms (which are rarely the same from company to company, and may require notarization, a corporate resolution with seal or even a “medallion signature”).
- Instruct the company in writing not to withhold taxes, ask the company’s representative when you should expect to receive the distribution and be sure to mark your calendar for follow-up.
- Check the statements and calculations when you receive the proceeds.
Securing distributions from these accounts should not be complicated, but problems can—and do—arise.
If the company does not send the funds even after you’ve completed their forms, additional forms and all of the supplemental forms, ask to be referred to the legal department. Sometimes the problem is that the company’s generic forms aren’t suitable for charitable entities and the administrative staff does not know what to do. The legal department should be able to resolve the matter quickly.
If the problem is more serious, such as the company claiming that your organization is not the intended beneficiary, you may need to retain counsel. Having obtained a copy of the designation of beneficiary form from the donor will be extremely helpful at this point (see note).
Life income arrangements
What you must do when a life income beneficiary passes away differs depending on whether your organization is the trustee or merely a beneficiary.
If your organization is the trustee or is otherwise responsible for managing the gift, notify your trust administrator and business office as soon as you learn of a life income beneficiary’s death. They will have to see that income distributions are terminated or, if there is a surviving life income beneficiary, redirected. You will need to confirm the successor beneficiary’s address and other contact information, obtain his or her social security number if it is not already in your files and make distribution arrangements (electronic deposit or mailed check). Regardless of the type of life income gift, the administrator will require a certified copy of the death certificate, which may be obtained through the estate’s administrator.
Charitable Remainder Trusts: If the life income gift is a charitable remainder trust (CRT) of which your organization is trustee, your trust administrator will be responsible for preparing the final trust statement and the trust’s final tax return, as well as the income beneficiary’s final K-1. If there is a successor life income beneficiary, the estate administrator should be provided with a K-1 for reporting income distributions during the year of death on the final income tax return.
If the trust was trusteed by a third party, you will need to obtain a copy of the original trust agreement and, if the donor retained the right to change the beneficiary, any amendments. This is important because if your organization was originally not the sole beneficiary, a change in the interest of one or more of the other charitable remaindermen may affect the percentage of your distribution.
Depending on the size of your interest, the cost to the trust and other factors, you may wish to request an accounting that shows distributions made to the life income beneficiaries, fees paid to the trustee and others (e.g., for tax work) and how the trust was invested. All fees and expenses should be reasonable and calculated correctly, the investments appropriate and all distributions to the income beneficiaries proper.
Expert advice, especially as to the reasonableness of the fees and whether the investments were appropriate, may be needed.
Charitable trusts are among the more difficult to administer correctly, so it is not uncommon to find that there have been mistakes in their administration, especially if the donor was the trustee or employed an advisor or institution that does not specialize in this area. Unfortunately, trustees sometimes have mismanaged charitable trusts for their own benefit. While rare, when this occurs, it is your obligation to protect your rights by making sure you receive all you are entitled to from the trust. If you are denied documents to which you are entitled, you do not understand them or you suspect something is amiss, seek counsel right away.
Charitable Gift Annuities: If the donor is the sole annuitant of a charitable gift annuity, any annuity payment that is due, but has not yet been received, on the date of death must be included in his or her estate. However, most agreements provide that the obligation to make payments ends with the last regular payment prior to the death of the annuitant.
If a donor annuitant dies before his/her actuarial life expectancy, the estate administrator may claim a deduction on the decedent’s final income tax return for the unrecovered “investment in the contract,” the total amount of gift annuity payments that would have been received free of tax by the donor if he or she had lived to their assumed life expectancy. Your finance office or outside charitable gift annuity administrator should provide the estate administrator with that calculation and a final 1099-R for reporting income paid to the annuitant during the tax year.
Note: While we do not suggest insisting on documentation of testamentary gifts, if the donor reveals that he or she is making a gift from a retirement plan, bank account or insurance or annuity policy, it is a good idea to advise the donor that sharing a copy of the designation of beneficiary document will make it much easier for your organization to deal with the company or plan administrator in the future