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Boulder Daily Camera
Enid Ablowitz

January 6, 2003
The Daily Camera

Giving IRD Assets is Tax-Wise

Giving simply is something I believe in, but I also believe in giving wisely.  Sometimes, having a little more knowledge of our tax system can help you identify ways of giving that match your personal objectives.  If one of them is saving taxes and your income level and asset base warrant looking at tax considerations when you make a gift, the concept of IRD might be of use to you.  IRD is the acronym for the IRS term, "Income with Respect to Decedent."  Generally, IRD is income that is 'owned' by a person at death but 'receivable' after death and that would be subject to tax.

Obvious IRD assets are retirement accounts like IRA's Keogh's, and qualified employer retirement benefits.  However, there are many other IRD assets that might not come to mind right away such as:  compensation earned but not received before death (including deferred compensation), accrued vacation or sick pay remaining after death, and income from investments, rentals and royalties accrued to date of death.  There's also non-recognized gain on US savings bonds, non-recognized income and gains from annuities, installment obligations from a prior sale, medical reimbursement rights, and others that your financial advisor or attorney may be able to identify for you.

There are two potential tax implications at work.  First, IRD assets would not yet have been subject to income tax.  Second, they may also be subject to estate tax. When you die, Uncle Sam wants to collect both. In fact, there are lots of taxes that could be imposed at death. Currently there are federal income tax, state income tax, federal estate tax (based on the total value of the estate and also depending on the year of death, the transfer laws and any trust provisions you have made), possible estate tax surcharge (if your estate is large enough), state inheritance tax (depending on the state) and generation skipping tax.  The 2001 tax act provides some estate tax relief by raising the thresholds on tax-free transfers and actually eliminates the inheritance tax in 2010, but there is a sunset provision that reinstates the taxes in 2011 at the pre-tax act rates. Even if estate taxes are eliminated permanently as has been proposed, IRD assets are still subject to income tax and would continue to be good assets to use for end-of-life charitable giving. 

Now let's suppose that you intend to leave something in your will to your favorite organizations.  You may want to consider specifying that your bequests come from your IRD assets.  The charities are tax exempt so the effect is to shelter both estate tax and income tax. (Caution:  this is a complex issue so you should discuss using IRD assets to make end-of-life charitable gifts with your attorney!)  Not surprisingly, there are important rules that you must follow carefully. A primary one is to make sure that the transfer is pre-arranged by including specific language directing your executor to first use any property, the receipt of which would constitute IRD for federal tax purposes, to satisfy the charitable gifts you identify. To avoid having the estate realize the gain, another strategy is to designate a percent of your estate rather than a specific amount.

There is a simple way to use IRD assets called the "direct transfer" method to make end-of-life gifts that many attorneys actually prefer.  You can change your beneficiary designation form for your IRA , 401k or other IRD asset.  Your gift is then made outside of the estate or trust.  This can avoid some of the complexity inherent in estate distributions and can be done for a percentage or the entire asset.

The more you know about tax-wise ways of giving, the more generous you can be.   

You may contact Enid Ablowitz by email at enidablowitz@hotmail.com

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