Over the years, you’ve no doubt read many articles and private letter rulings about what it takes for a trust to qualify as a “see-through trust” under the required minimum distribution regulations (RMDs) for retirement accounts.1 For a trust to be classified as see-through, it must:
- be a valid trust under state law or would be but for the fact that there’s no corpus;
- be irrevocable, or will, by its terms, become irrevocable on the death of the account owner,2
- have beneficiaries who are identifiable from the trust instrument within the meaning of Treasury Regulations Section 1.401(a)(9)-4, A-1; and
- have documentation described in Treas. Regs. Section 1.401(a)(9)-4, A-6 that’s been provided to the plan administrator (or IRA sponsor).3
The biggest hurdle is the third requirement that all beneficiaries must be “identifiable.” Decoded, that means that all trust beneficiaries must be “designated beneficiaries,” that is, the trust beneficiaries who may have any interest in the retirement accounts payable to the trust must all be individuals.4
The regulations provide an off-ramp for those trust beneficiaries that aren’t individuals, usually, charities.5 The regulations and PLRs provide that if the non-designated beneficiary no longer has an interest in the retirement account by Sept. 30 of the year following the year of the account owner’s death,6 the non-designated beneficiary won’t be considered or counted for purposes of determining whether the trust is see-through and for purposes of determining the life expectancy used to determine the applicable distribution period for RMDs.7
The solution seems deceptively simple. Pay out the problematic beneficiary’s interest in the trust’s retirement account before the Sept. 30 deadline. It can be anything but simple. If your client is administering a trust with both individual and charitable beneficiaries, transforming it into a see-through trust is much harder than it looks.
The Scenario
Your client, Laura, is the trustee and a beneficiary of her brother’s, Rob’s, revocable trust. Rob never married and had no children. He died at age 68 in June 2021. His trust, which became irrevocable at his death, was funded with his home worth $400,000, cash and securities worth $200,000 and a rollover IRA worth $2.4 million. The trust residuary beneficiaries are Laura, age 65, with a 60% share, and his two favorite charities, each with 20% shares.8 The beneficiaries’ interests in the trust are paid outright to them.
The trust instrument doesn’t authorize or direct the trustee to pay any charitable devises from gross income. Additionally, the trust instrument doesn’t direct the trustee to pay the charities from the IRA, specifically, nor from income in respect of a decedent (IRD), generally.9 The trustee powers include a provision authorizing the trustee to make non-pro rata distributions of the trust assets among the beneficiaries without regard to income tax basis in cash or in kind.10
Post-Setting Every Community Up for Retirement Enhancement (SECURE) Act, Laura is an eligible designated beneficiary (EDB) because she isn’t more than 10 years younger than Rob as of the date of Rob’s death.11 Therefore, she wants to stretch her share of the IRA over her remaining life expectancy, which will be 22 years based on Laura attaining age 66 in 2022.12 As of Rob’s death, the trust isn’t see-through. Because Rob died before his required beginning date (RBD)13 at age 68, if the trust isn’t see-through by the Sept. 30 deadline, the trust is deemed not to have designated beneficiaries (DBs), and the IRA must be paid out using the 5-year rule instead of Laura’s life expectancy.14 Laura wants to be sure that the payout of the IRA shares to the charities will have no tax impact to her or to the trust.
Intersection of Rules
It’s crucial to understand the interplay between the see-through trust rules and the trust charitable deduction rules for the administration of Rob’s trust. To meet Laura’s desire to stretch her share of the IRA, the charities’ interests in the IRA must no longer be part of the trust by the Sept. 30 deadline.
Rob’s trust was drafted in 2014 without consideration of the fiduciary income tax rules for charitable contributions. To minimize income taxes from the IRA, the best strategy would have been to name Laura and the charities as the beneficiaries in Rob’s beneficiary designation. The charities would have collected their shares of the IRA shortly after Laura notified the IRA sponsor of Rob’s death. Because the charities are tax-exempt, they would pay no tax, and if the charities collected their shares before the Sept. 30 deadline, Laura could use her life expectancy to compute her RMDs as an EDB.15 Rob’s trust wouldn’t be involved.
Instead, Laura figures she can withdraw the charities’ 40% share of the IRA and distribute it to the charities, and the trust will get a tax deduction for the contribution. This isn’t the case. Under Internal Revenue Code Section 642(c)(1), if the trust instrument doesn’t authorize or require the trustee to pay the charities from gross income, the trust can’t take a charitable contribution deduction on the trust’s income tax return.16 There’s no distributable net income (DNI) deduction17 for a distribution to charity. Only distributions of trust income to individuals can qualify as DNI. If the charities’ shares of the IRA were paid into the trust and distributed to the charities under these facts, the trust would report and pay the income tax on the amounts withdrawn from the IRA, mostly at the highest marginal rate.
Fortunately, because the trustee is authorized to make distributions in kind, Laura can avoid income tax to the trust by distributing inherited IRAs created by each beneficiary to receive their shares of Rob’s trust’s IRA. The transfer of the IRA asset in kind doesn’t trigger income recognition to the trust under the IRD rules in this case.18 The transfers of Rob’s IRA into inherited IRAs aren’t taxable events to the trust, and they aren’t reported on the trust’s fiduciary income tax return. Once a charity’s inherited IRA is in place, it will be cashed out, and the proceeds will be distributed to the charity. The charities are tax exempt and won’t pay income tax on the distribution. Laura will also receive an inherited IRA and will only pay tax on withdrawals for RMDs and any additional withdrawals as she takes them. Because the value of Rob’s IRA is 80% of the total value of all trust assets, the IRA will be divided in proportion to the trust shares allocable to Laura and each charity. How the division is accomplished is next.
The Logistics
The logistics necessary to remove the charities as beneficiaries of the IRA payable to the trust by the Sept. 30 deadline can be daunting. Each IRA sponsor has different requirements, and there can be variations within a financial institution depending on, for instance, whether the account owner acquired the IRA through a retail portal or an investment advisor. There will be a lot of paperwork to be completed, and there will be extra paperwork for the charities.19 The trustee should start as soon as possible and be told to expect delays.
Initiating the Process
Either the trustee or the account owner’s investment advisor, if any, will contact the IRA sponsor to notify the sponsor of the account owner’s death. The IRA sponsor will require an original or a copy of a certified death certificate to verify the death. If an original is required, it may not be returned to the trustee. The trustee will be connected with the IRA sponsor’s department that’s dedicated to servicing beneficiaries of deceased account owners.20
The trustee will receive a letter from the “inheritor services department,” which will likely include forms for the trustee to complete, including a beneficiary claim form for the trust, a certificate of trust existence form to verify the trust’s existence and the trustee’s authority to act on behalf of the trust. If the account owner died on or after the RBD, the claim form will include a section for taking any portion of the account owner’s remaining RMD for the year of death. The IRA sponsor often requires the trustee to create an inherited IRA in the name of the trust, but some sponsors allow the trustee to skip this step if the trust beneficiaries will take their shares outright from the trust.21 The client should be prepared to create an inherited IRA in the name of the trust, particularly in Laura’s case, because the trust isn’t yet see-through.22 In addition, the trustee should give the attorney or other tax professional representing Laura written permission to directly communicate with the IRA sponsor so that the attorney can discuss complicated tax and procedural issues with the sponsor representatives without the client on the phone each time an issue arises.
The trustee should send a copy of the trust and any relevant amendments to the IRA sponsor as soon as possible and not wait until the Oct. 31 deadline approaches. I recommend not sending a list of the beneficiaries who may have an interest in the IRA to the sponsor, unless required by the sponsor.
Some IRA sponsors will require a PLR or an opinion letter by an attorney that a trust is see-through. It may not be difficult to provide the opinion letter if the attorney is conversant with the see-through trust rules. However, in Laura’s situation, the attorney can’t give this opinion because the trust isn’t yet see-through. The attorney may want to find a more “friendly” sponsor that won’t require an opinion letter, let alone a PLR, particularly if the trust had multiple IRAs payable to it, so the client can deal with an IRA sponsor that will review the trust, understand Laura’s situation and request information about the trust as needed. Ideally, the attorney would explain the issues to the proposed IRA sponsor’s inheritor services group representative and would quickly follow up by letter or email with a copy of the trust and any amendments. More forms will follow from the new sponsor for the transfer of the IRA(s) to the new sponsor.
The Paper Chase
Accurately completing the forms for the trustee and the beneficiaries is usually the most time-consuming part of the process. In my practice, we either complete the forms, except for personal information, on behalf of the trustee and beneficiaries or include a prototype of each form for them to follow as they complete the forms. Laura’s attorney may have to explain to the IRA sponsor and the charities why the charities must create an inherited IRA to receive their IRA proceeds in this case.
The forms are confusing, sometimes even for those of us who work with inherited IRAs frequently. It’s easy for a beneficiary to inadvertently check the box for a lump sum distribution when the situation calls for an inherited IRA, especially if the situation is similar to the Rob and Laura scenario. As the SECURE Act phases in, the sponsors’ forms will be even more complicated with the addition of requirements for EDBs on the forms. In addition, sometimes the beneficiary will make mistakes, or not complete all required information, and the forms will have to be redone.23 The individual beneficiaries will submit forms that request the establishment of the inherited IRA, name successor beneficiaries and make arrangements for RMDs if the beneficiary is an EDB like Laura or is a designated beneficiary and is subject to the 10-year rule.24 There may also be forms for the designated beneficiary to move the inherited IRA to an IRA sponsor of the individual beneficiary’s choosing. The forms for the charities to liquidate their inherited IRAs as soon as their accounts are established will be part of the forms completed and submitted. Laura’s attorney may spend time on the phone determining exactly how to complete some of the forms. The forms and instructions aren’t always clear.
In my practice, the completed forms are returned to my office for submission to the IRA sponsor at the same time. The trustee will send a comprehensive letter of instruction (LOI) to the IRA sponsor, which I draft, with all the steps needed to accomplish the goals for the distribution of the IRA into inherited IRAs.25 Typically, if not already completed, the trustee will establish an inherited IRA and then direct the sponsor to divide the trust’s inherited IRA in the percentages or fractions for each beneficiary and distribute the beneficiaries’ shares into each beneficiary’s inherited IRA on the same day. The charities will have submitted forms to immediately liquidate their inherited accounts. Nevertheless, I make it clear in the LOI that the charities’ accounts must be liquidated no later than the Sept. 30 deadline. The individual beneficiaries shouldn’t do anything with their inherited IRAs until I confirm that the trust is see-through. In one particularly difficult case, the trust didn’t attain see-through status until Sept. 29. I wouldn’t submit the beneficiaries’ forms to move the inherited IRA or take distributions until see-through trust status is assured.26
Two additional tips: The trustee should sell the investments in the trust’s inherited IRA early to avoid dividends that may arrive after Sept. 30 and the tiny interest payments that will accrue on the cash held in the trust’s inherited IRA each month. The sale isn’t a taxable event to the trust because it’s within the IRA, not the trust. IRA sponsors will hold any cash in a money market account that will earn a small amount of interest and may be credited to the account in the following month. I haven’t seen any PLRs that address the issue, but in a very large IRA, the interest may be significant enough that the charities’ interests in the inherited IRA won’t be deemed extinguished by Sept. 30, which is a bright-line rule under the regulations. For that reason, the trustee should aim to have the charities’ accounts liquidated no later than the Aug. 31 ahead of the Sept. 30 deadline so that the residual interest can be paid to the charities in September. I also try to persuade the charities to grant permission for me to obtain a copy of the final two statements directly from the IRA sponsor showing the liquidation of their inherited IRAs and a zero month-end balance for my files and the trustee’s files. I’ll have the charities’ representatives sign a statement I prepare granting permission that I send with the instructions and documents. The trustee doesn’t have access to the statements of the beneficiaries’ inherited IRAs once funded because they’re no longer part of the trust.
Non-Pro Rata Distributions
Suppose Rob’s trust was instead funded with his home worth $400,000, cash and securities worth $1.2 million and a rollover IRA worth $2.4 million. In addition, the trust instrument authorizes the trustee to pay any charitable devises from gross income. Laura would like to satisfy the entirety of the charities’ shares of Rob’s trust using the IRA so she can receive all of the non-IRA assets. Laura proposes withdrawing $1.6 million from the IRA and paying $800,000 to each charity. Assume the trust has no other income and no deductions this year. Laura has the authority to “pick and choose” which assets to use to fund the various shares. However, the trust doesn’t specify that the charities’ shares must be paid using the IRA proceeds or even that the charities’ shares must be paid first from IRD.
The trust will receive a charitable contribution deduction, but it may not be for the entire amount of the distribution under these facts. Because there are no directives in Rob’s trust regarding IRD, or the payment of trust income, generally, Laura’s exercise of discretion to pay the charities a disproportionate share of the IRA means that the allocation to the charities has no independent economic effect aside from tax avoidance.27 Therefore, 40% of the IRA proceeds withdrawn from the IRA will be allocated to the charities and will receive a charitable contribution deduction, but 60% of the IRA proceeds will be allocated to trust income and won’t be deductible.28 In contrast, if the trust instrument specifically allocates Rob’s IRA to the charities, or contains a directive that the charities’ shares can only be paid from IRD, the allocations should have independent economic effect, because the charities may not receive their entire 40% share if, for example, Rob’s IRA had been largely depleted during his lifetime. If the trust instrument stated that the charities “must be paid first from IRD,” the payment may have independent economic effect.29 But the charities will still get their 40% interest in the trust so there’s no negative impact to the charities. When a trust has, or may have, charitable beneficiaries, it’s important to clearly define “income” to include IRD and to instruct the trustee to distribute the IRD asset or pay the IRD to the charities.
The only way the trust will definitely avoid paying tax on the income Laura would otherwise have withdrawn is to create inherited IRAs for the charities. However, if the charities receive their trust shares disproportionately from the IRA, there’s a problem with the see-through trust rules. The disproportionate allocation of the IRA to the charities taints the remaining IRA share for Laura because the charities will, in effect, receive part of Laura’s share of the IRA, and the charities are the beneficiaries with the shortest life expectancy of zero. Unless the charities interest in the trust, not just the IRA, will be completely distributed to the charities by the Sept. 30 deadline, it will be best to distribute the IRA proportionately among the beneficiaries.
Finally, there will be times after the SECURE Act when the trustee must decide whether the cost to make the trust see-through exceeds the benefit. If no charitable contribution deduction is available, but the post-mortem expenses of administration will offset the trust income recognized from withdrawing some retirement account proceeds to pay the charities, such as small pecuniary charitable devises or a small share of the trust residuary, then it may be easy to attain see-through trust status. If the trust lacks the direction to pay the charities from gross income, then creating inherited IRAs for the charities may be inevitable, especially if there are eligible designated beneficiaries and the trustee might need to make the trust see-through. On the other hand, if the account owner died after the RBD and the non-spouse EDB is very close in age to the account owner, if the trust isn’t see-through, the account owner’s ghost life expectancy likely will be used to determine the RMD payout rate.30 The difference in the available deferral from see-through trust status may be negligible, or non-existent, if the EDB is older than the account owner. The benefits of see-through trust status may be outweighed by the cost to make the trust see-through. But the best way to avoid this problem altogether is to name the charities as the beneficiaries of the retirement account through the IRA beneficiary designation and not through a trust.31
Endnotes
1. Treasury Regulations Section 1.401(a)(9)-0, et. seq. References to “the regulations” refers to the required minimum distribution (RMD) regulations unless otherwise noted. Internal Revenue Code Section 401(a)(9) never mentioned trusts until the Setting Every Community Up for Retirement Enhancement (SECURE) Act, P.L. 116-94, enacted on Dec. 20, 2019, included applicable multi-beneficiary trusts for special needs beneficiaries. The term “see-through trust” is a colloquialism that developed after the regulations were issued. Treas. Regs. Section 1.401(a)(9)-4, A-5(b). A big “thank you” to Christopher R. Hoyt for his valuable input and insights.
2. “Account owner” refers to the original plan participant in any defined contribution plan account such as an IRC Section 401(k), 403(b) and 457 plan as well as the original owner of an individual retirement account or Roth IRA. References to these defined contribution plan accounts will be to “retirement accounts” or “retirement benefits” unless context requires otherwise. An “IRA sponsor” may be an IRA custodian or trustee.
3. The “documentation” is either the trust and any amendments to the trust or a list of all of the trust beneficiaries that may have an interest in the retirement accounts payable to the trust. With one exception that isn’t relevant to this discussion, the documentation must be provided by Oct. 31 of the year following the year of the account owner’s death. Treas. Regs. Section 1.401(a)(9)-4, A-6(b).
4. Treas. Regs. Section 1.401(a)(9)-4, A-5(b)(3) requires that the beneficiaries be “identifiable within the meaning of A-1 of this section from the trust instrument,” and Treas. Regs. Section 1.401(a)(9)-4, A-1 contains the definition of a “designated beneficiary.”
5. A beneficiary that’s not a designated beneficiary will be referred to as a “non-designated beneficiary.” The account owner’s estate is deemed to be a phantom non-designated beneficiary if the retirement benefits are used to pay estate taxes, the account owner’s debts and expenses of administration.
6. The Sept. 30 date will be referred to as the “Sept. 30 deadline.”
7. Treas. Regs. Section 1.401(a)(9)-4, A-4(a). Eliminating beneficiaries by the Sept. 30 deadline includes paying expenses of administration, debts and estate taxes and distributing an older trust beneficiary’s trust share if their life expectancy may negatively impact the life expectancy used to determine the applicable distribution period. The older beneficiary may also disclaim their interest in the trust within nine months of the account owner’s death through a qualified disclaimer pursuant to IRC Section 2518. The impact of older beneficiaries’ life expectancies on RMDs is unclear following the SECURE Act if all trust beneficiaries are subject to the new 10-year rule.
8. When a charity is a beneficiary of a trust, state law may require that the trustee notify, and keep informed, the attorney general’s office for the state where the trust is being administered as an interested person in the trust administration.
9. Distributions from retirement accounts are taxed at ordinary income tax rates as income in respect of a decedent (IRD) to the beneficiaries, including a trust. IRC Section 691. For a more complete discussion of the implications of payment of IRD to charities through a trust, see Christopher R. Hoyt, “Structuring a Charitable Bequest of IRD Assets,” Trusts & Estates (June 2015).
10. This scenario is more common than you may think. I’ve helped trustees and other attorneys administer several trusts with similar facts over the past five years or so.
11. The SECURE Act added a new sub-category of designated beneficiaries to the RMD rules: eligible designated beneficiaries (EDBs). These EDBs, determined as of the date of the account owner’s death, are the surviving spouse, the account owner’s minor children, beneficiaries who are disabled or chronically ill or a beneficiary who’s not more than 10 years younger than the account owner and who doesn’t qualify in another EDB category. IRC Section 401(a)(9)(E)(ii)(I-V). The not-more-than-10-years-younger beneficiary can be older than the account owner, just not more than 10 years younger than the account owner. These EDBs may use the life expectancy method to determine RMDs from their shares of the retirement accounts. All non-spouse designated beneficiaries who aren’t EDBs must use the 10-year rule and must liquidate their accounts by Dec. 31 of the year containing the 10th anniversary of the account owner’s death or by using the account owner’s remaining unused life expectancy (ghost life expectancy) if the account owner dies on or after the required beginning date (RBD). The ghost life expectancy rules may change when proposed regulations for the SECURE Act are issued.
12. Updated life expectancy tables will take effect for distribution calendar years beginning on or after Jan. 1, 2022. Treas. Regs. Section 1.401(a)(9)-9(b) is the single life table. A non-spouse EDB’s life expectancy factor is determined starting in the year following the year of the account owner’s death and is reduced by a factor of one each year thereafter.
13. The RBD for a traditional IRA owner as of 2020 is April 1 of the year following the year in which the account owner attains age 72. IRC Section 401(a)(9)(C). An account owner in an employer plan may be able to defer until April 1 of the year following the year of retirement if the account owner retires after age 72.
14. Section 401(a)(9)(B)(ii).
15. Under the separate account rules of Treas. Regs. Section 1.401(a)(9)-8, A-2(a)(2), generally, if separate accounts are established by Dec. 31 of the year after the year of the account owner’s death for each beneficiary, the beneficiaries may take RMDs based on their own life expectancies and not the life expectancy of the beneficiary with the shortest life expectancy, in this case, the charities that have no life expectancy. Whenever a charity is involved, the best practice is to remove the charities by the Sept. 30 deadline. Moreover, the separate account rule doesn’t apply to trusts so that the charities must be removed from the IRA or trust by the Sept. 30 deadline. Treas. Regs. Section 1.401(a)(9)-4, A-5(c). The use of the beneficiary’s own life expectancy is limited to EDBs under the SECURE Act.
16. Internal Revenue Service Form 1041. See supra note 9 for some exceptions that aren’t relevant here.
17. IRC Sections 651(a) and 663(a)(2); Revenue Ruling 68-667, amplified by Rev. Rul. 2003-123. There are additional rules for distributions of income to charities such as the need to trace the actual income paid to the charities. There can be distributable net income (DNI) deductions for trusts that are beneficiaries of another trust.
18. Section 691(a)(2). The transfer of the right to receive IRD doesn’t generate income to the beneficiary. Treas. Regs. 1.691(a)-4 implies that because the payment of a specific or residuary devise doesn’t trigger the acceleration of IRD when the specific or residuary devise is paid, the payment or use of an item of IRD does accelerate the income when it’s used to pay a pecuniary devise. Payment of the pecuniary devise with IRD is considered a sale to enable the distribution of the amount due, for example, $100,000. In the IRA payable to a trust context, see Chief Counsel Advice 200644020 (Nov. 3, 2006).
19, For more on this point, see Christopher R. Hoyt’s accompanying article, “Obstacles When Charities are Named as Beneficiaries of a Retirement Account,” on p. 50 of this issue of Trusts & Estates.
20. Sometimes the investment advisor is the point of contact for all communications with the IRA sponsor.
21. If the retirement account is in an employer plan, the trustee would have to set up an inherited plan account until the trust is see-through. Employer plans must allow designated beneficiaries to complete a direct rollover from the plan to an inherited IRA. IRC Section 402(c)(11). However, at this stage of administration, the trust isn’t see-through so inherited IRAs can’t yet be established for the trust beneficiaries. The process is arduous and may not be successful depending on whether the plan administrator is willing to set up inherited plan accounts for the trust beneficiaries. The charities would cash out their plan accounts before the Sept. 30 deadline so that the trust becomes see-through, and the remaining individual beneficiaries may then establish inherited IRAs and complete a direct transfer from their inherited plan accounts to their respective inherited IRAs.
22. The inherited IRA will be captioned something like, “Rob Petrie, deceased, f/b/o the Rob Petrie Trust, dtd August 3, 2014, Laura Petrie, Trustee,” or words to those effect. The IRA sponsor may call an inherited IRA a “Beneficiary IRA” or something similar. The taxpayer ID number for the trust will be used for the account.
23. This happens frequently with charities because of the additional personal information required by The Financial Crimes Enforcement Network (FinCEN) when companies, including charities, open accounts, such as inherited IRAs. The purpose is to avoid money laundering and similar illicit activities, but the requirements are burdensome in a transaction for an account of virtually no duration. See supra note 19. The IRA sponsor may also require different individuals at the charity to sign different forms and to include articles of incorporation or consent resolutions.
24. As of the date that this article was submitted, it’s unclear whether a designated beneficiary will use only the 10-year rule or may use the account owner’s remaining life expectancy if the account owner dies on or after the RBD and the account owner’s remaining ghost life expectancy is longer than 10 years.
25. The letter may require a medallion signature guarantee. One IRA sponsor allows its customers to sign at its local offices in lieu of the medallion guarantee. In those cases, I’ve allowed my client to deliver the completed package to the sponsor. I was “on call” for any questions that could arise during the meeting. Give the client written instructions on what needs to be delivered and when to sign certain documents. Also, have the sponsor provide a time-stamped copy of the documents submitted. During the pandemic, it may be difficult to get a signature guarantee. Allow extra time.
26. If the accounts are in inherited employer plan accounts, then delaying any action by the beneficiaries is a must because a non-spouse beneficiary rollover to an inherited IRA will only be valid once the trust is see-through. That was the case in my Sept. 29 example.
27. Treas. Regs. Sections 1.642(c)-3(b)(2) and 1.652(b)-2. For a complete discussion of the issue of independent economic effect and charitable contribution deductions for estates and trusts generally, see F. Ladson Boyle and Jonathan G. Blattmachr, “IRD and Charities: The Separate Share Regulations and the Economic Effect Requirement,” American Bar Association, 52 Real Property, Probate and Trust and Estate Law Journal 369 (Winter 2018). The article doesn’t address see-through trust issues.
28. See Boyle and Blattmachr, ibid., at pp. 394-395. In conversations with Christopher Hoyt, he argues, persuasively, that the result of Treas. Regs. Section 1.662(b)-2, Example 1 is that Rob’s trust, as is in the second scenario, is sufficient to allow the entire charitable contribution deduction for the $1.6 million contributions to the charities. Example 1 prioritizes determining the income allocated to the charitable contribution deduction before determining the DNI to discretionary income individual beneficiaries who are Tier 2. This gives the charitable contribution deduction higher priority (as “Tier 1.5 beneficiaries”) after mandatory distributions of trust accounting income to the Tier 1 individual beneficiaries (with no Tier 1 beneficiaries in our scenarios). Reasonable minds may differ in this murky area of the tax law.
29. See supra note 9. In that article, Christopher Hoyt suggests that if there’s a possibility that the trust may include a charity, the drafter should include a directive to pay the charity first from IRD. It may not help but, like chicken soup, it couldn’t hurt. (But not for a pecuniary devise, then it could hurt. See supra note 18.)
30. As of the date of the final submission of this article, proposed regulations for the SECURE Act haven’t been issued.
31. See Christopher Hoyt’s companion article, supra note 19, for alternative ways to leave retirement accounts to charities and avoid trusts entirely.