A decedent had set up a trust that provided for certain specific gifts to be made upon his death and then for the residual amount remaining to be transferred to a charity. Part of the residual assets include an individual retirement account (“IRA”). IRC Section 691 generally provides that when someone receives something that would have been taxable income had it been received by the decedent, it is also taxable income to the recipient. This is referred to as “income in respect of a decedent.” It also provides that if the holder of such right transfers it, he must report taxable income equal to the fair market value of the transferred right plus the amount by which any consideration received exceeds such value. A question arose whether the trust should recognize income upon the transfer of the IRA to the charity, since the decedent would have recognized taxable income upon receiving distributions from the IRA.
In PLR 200826028, the IRS ruled that the estate did not have taxable income upon the transfer. It was treated under a provision that says if you make a specific gift of your IRA account to someone at your death, they are taxed when they receive distributions, but your estate is not taxed. While the distributions are treated as gross income to the charities, since they are tax exempt organizations, they do not have to pay income taxes on that income.
This ruling should be contrasted with ILM 200644020 (reported on in Vol. 1, No. 3, December 2006), where the IRA was transferred to a charity to satisfy a specific pecuniary amount gift to the charity. In that case, the estate was required to report income under Section 691. IRAs can be ideal assets to leave to charity since if they are left to a family member, they become subject to both estate tax and income tax, as a result of the Section 691 rules. The best practice is to make a specific gift of the IRA to your designated charity. This will clearly avoid any income tax to the estate.