No, this article has nothing to do with Timothy Leary. The LSD of the estate planning community is the "lump sum distribution," which can sometimes produce significant tax benefits for individuals who have participated in a certain type of company retirement plan and can afford to give those assets away.

Normally, a participant in a retirement plan cannot give away those retirement assets, even to a charity, without recognizing the entire amount as income that year. This tends to lock up retirement benefits until the owner's death, even for individuals who would be willing and able to use the funds for charitable planning or for other purposes.

However, qualified IRC §401(a) retirement plans funded mainly with employer stock can qualify for special tax treatment, allowing living individuals to use LSDs to make current or deferred charitable gifts without having to report the whole account’s value as income. This can be especially useful for people with large estates and plenty of cash flow and whose company stock has substantially appreciated.

For example: suppose Jim is reaching retirement from his employer of 20 years, which offers its employees a qualified §401(a) retirement plan. Jim's retirement account holds 10,000 shares of company stock, currently valued at $100 per share, but the cost basis is $10 per share. If Jim takes a LSD, he will have to pay income tax on the total cost basis ($100,000). But if he sells the stock, he will immediately recognize a taxable capital gain for the "net unrealized amount" (NUA), which is $900,000.

However, if he takes a LSD and transfers the stock to a charitable remainder trust (CRT), the trust can then sell the stock, paying no capital gains tax for the NUA, and can then diversify into a portfolio of investments, while Jim retains the trust's income interest for life. The income tax charitable deduction for the transfer can be structured to offset the income tax on the $100,000.

The result:

• $1,000,000 has been removed from Jim's estate without incurring gift taxes;
• Jim receives trust income for life from the CRT;
• Jim effectively pays no income tax on the LSD;
• Jim's favorite charity receives the remaining trust assets upon Jim's death.