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SPECIAL GIFT SITUATIONSproperty is exempt from federal income tax. 283 When income in respect of adecedent is received, the estate (or, if paid directly to a person, the person) isrequired to include it on the federal income tax return for the year it wasreceived. 284 The recipient can, however, claim an income tax deduction for thefederal estate tax attributable to the income in respect of a decedent. 285There are many forms of income in respect of a decedent, such as uncollectedlottery winnings and installment sales payments. Another common—andrapidly growing—source is distributions from a decedent’s retirement planaccount. These accounts include profit-sharing plans, individual retirementaccounts, 401(k) retirement plans, and 403(b) tax-sheltered annuity accounts.EXAMPLE 9.6This is an example of bequests of property in respect of a decedent in the absence of acharitable gift. A grandparent (GP) wishes to treat his grandson (GS) and granddaughter (GD)equally in his estate planning. His estate includes $100,000 of stock (with a basis of $60,000)bequeathed to GD and $100,000 in his 403(b) tax-sheltered annuity account to GS. Both theseassets will be subject to the estate tax if the estate is valued in excess of $600,000. When GDreceives her $100,000 of stock, she does not have to pay any income tax; indeed, she receivesa stepped-up basis in the stock so that a subsequent sale of the stock for $100,000 will nottrigger any tax on the capital gain. aBy comparison, when GS receives the $100,000 from the retirement plan, the entire amountbecomes subject to income tax (as income in respect of a decedent). Although GS can deductthe applicable federal estate tax to lessen his income tax exposure, GP failed in his effort totreat his grandchildren equally, because GS will have fewer after-tax resources than GD.aIRC § 1014.(b) Charitable Contribution PlanningCharitable bequests should be made, to the extent possible, from property thatconstitutes IRD. In many instances, there is a gross misallocation of resourceswith respect to charitable bequests. Individuals fill out their retirement planbeneficiary designation forms to leave their taxable assets to family membersand instruct their lawyers to prepare wills that leave tax-free assets to charitiesin the form of charitable bequests. Proper planning principles dictate reversal ofthis situation: The taxable assets (income in respect of a decedent) should beused for charitable bequests and the tax-free assets should be given to familymembers. 286Even individuals who had not planned on making a charitable bequestshould consider giving IRD assets to charity at death. Although the highestmarginal estate tax rate reaches 55 percent with estates in excess of $3 million,287 the combination of estate and income taxes on IRD assets can exceed 75283 IRC § 102(a), (b).284 IRC § 691.285 IRC § 691(c).286 An example of the appropriate manner in which to structure these transfers, when charitable organizationswere not taxable on the IRD resulting from bequests of 403(b) annuity contracts and individual retirement accounts,was provided in Priv. Ltr. Rul. 200234019.287 See § 8.1. 304