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Tax advantages of charitable foundation as IRA beneficiary.

In Letter Ruling 9341008, an individual proposed to establish a Sec. 509(a) private foundation that would qualify for exempt status as a charitable organization under Sec. 501(c)(3). She also proposed to make the foundation the beneficiary of her individual retirement accounts (IRAs).

The IRS National Office ruled that, if she took these steps, her estate would be entitled to a charitable contribution deduction for the fair market value (FMV) of the IRA distributed to the charitable foundation, and that neither the estate nor its beneficiaries would be taxable on the IRA's proceeds. This means that her estate will be able to deduct an amount that has never been included in any taxpayer's income.

In some respects, the ruling follows the longstanding rule that taxpayers generally receive the benefit of a charitable deduction equal to the FMV of the contributed property even though a portion of that value may represent appreciation that has gone untaxed.

Until this letter ruling, however, it was not certain whether the IRS would follow this general principle if the contributed property was an IRA. IRAs generally attain their value through pretax contributions and untaxed earnings. The Service concluded that, when the IRAs are distributed to the foundation, the amounts that would have been taxable income to the taxpayer if distributed to her will be income in respect of a decedent to the foundation (which of course is not taxable), but not to the decedent's estate or its beneficiaries.

With respect to the tax consequences to the private foundation, the ruling concluded that the foundation will not be subject to the Federal excise tax on investment income when it receives the taxpayer's IRA. The ruling also mentioned Rev. Rul. 80-118, which held that a bequest of Series E bonds to a private foundation resulted in investment income when the bonds were redeemed by the foundation.

As a planning matter, note that individuals must begin withdrawing from their IRAs when they reach the age of 70 1/2. This means that the amount of the charitable gift will decrease as the individual exceeds that age and makes the required withdrawals.

From Eugene Nadel, CPA, J.D., New York, N.Y.
COPYRIGHT 1995 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:individual retirement account
Author:Nadel, Eugene
Publication:The Tax Adviser
Article Type:Brief Article
Date:Feb 1, 1995
Words:365
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