Using a charitable remainder trust (CRT) to replace the stretch IRA

by RSM US LLP

ARTICLE  | 

Authored by RSM US LLP

Prior to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, advisors had a good solution for the post-death distribution of tax-inefficient IRAs. Instead of making a lump-sum taxable distribution at death, IRA owners were able to “stretch” the distributions over the lives of their children, grandchildren or other beneficiaries. Consequently, assets were able to grow in a tax-deferred account potentially for decades after the IRA owner’s death. However, the SECURE Act prohibited the stretch IRA for nonqualified beneficiaries by capping the distribution period to 10 years after the owner’s death. Consequently, IRA beneficiaries can now be stuck with a very tax-inefficient asset after the owner’s death.

One possible solution to replace the stretch IRA is to name a charitable remainder trust (CRT) as the beneficiary of the IRA, and name the owner’s children as income beneficiaries of the trust. The annual income distributions can be made over the lives of the children, not just the 10-year period mandated by the SECURE Act. However, a number of factors are important to consider before implementing this strategy.

Advantages

  • Several CRT options are available, such as fixed annuity payouts versus unitrust distributions. Also, unitrust distributions may have a “makeup” provision, allowing amounts not paid due to lack of trust income, being made up in the future with income excesses. Consequently, the makeup provision preserves the principal of the trust. The attractiveness of each alternative depends on the IRA owner’s specific situation.
  • The portion of the CRT that will be left to charity will help reduce the IRA owner’s taxable estate.
  • The CRT strategy is well accepted by the IRS. Simple CRT requirements are contained in Internal Revenue Code section 663.
  • If the grantor intends to leave assets to charity, the CRT can combine tax and philanthropic planning that complements the grantor’s overall financial plan.

Disadvantages

  • The income beneficiary can receive only the specified payout, whether an annuity amount or a unitrust amount. Unlike IRA funds, principal from the CRT is not available for the income beneficiary’s use. If the grantor wishes to leave additional funds to a human beneficiary, the funds must come from other types of accounts, or from life insurance.
  • To qualify for CRT treatment, the charitable remainder interest must be at least 10% of the total trust value. For this test, the actuarial remainder value is based on the income beneficiary’s age. Consequently, an older beneficiary (e.g., a child) will meet this requirement more readily than a younger one (e.g., a grandchild).
  • The IRA value will be included in the grantor’s estate for purposes of calculating estate tax. The estate tax would be offset only partially by a charitable deduction for the value of the remainder interest. The estate tax associated with the income beneficiary’s interest must be paid by other assets of the estate.
  • There will be additional administrative costs associated with the creation and maintenance of a CRT, including legal and tax compliance fees.

Summary

A CRT named as a beneficiary to an IRA may be a solution to provide an income stream to a family member and a substantial deferred gift to a charity. This strategy will probably make sense only when the grantor has the dual goal of (1) providing only an income stream to an “older” beneficiary, and (2) making a significant deferred gift to charity. In other situations, it may not provide a better estate planning outcome when compared to the SECURE Act provisions. Coordination among advisors—legal, tax and wealth—should provide a good starting point in evaluating this strategy.

This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, insurance, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. Information has been obtained from a variety of sources believed to be reliable though not independently verified. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. Past performance does not indicate future performance. The sole purpose of this document is to inform, and it is not intended to be an offer or solicitation to purchase or sell any security, or investment or service. Investments mentioned in this document may not be suitable for investors. Before making any investment, each investor should carefully consider the risks associated with the investment and make a determination based on the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives.

Tax and accounting services are provided by RSM US LLP, a registered CPA firm. Investment advisory, aggregated reporting, financial planning, retirement plan advisory and other wealth management services are provided by RSM US Wealth Management LLC, an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) and wholly owned subsidiary of RSM US LLP. Registration as an investment advisor does not imply any skillset of the wealth manager and/or its advisors.

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International.

RSM, the RSM logo and the power of being understood are registered trademarks of RSM International Association.

© 2021 RSM US LLP. All Rights Reserved.

Let’s Talk!

Call us at (661) 834-7411 or fill out the form below and we’ll contact you to discuss your specific situation.




  • Should be Empty:
  • Topic Name:

This article was written by Donna Thrane, Tim Gianos and originally appeared on 2021-09-10.
2021 RSM US LLP. All rights reserved.
https://rsmus.com/what-we-do/services/wealth-management/using-a-charitable-remainder-trust-to-replace-the-stretch-ira.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Daniells Phillips Vaughan & Bock is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how Daniells Phillips Vaughan & Bock can assist you, please call (661) 834-7411.

  • Posted in Insights, Uncategorized
  • Comments Off on Using a charitable remainder trust (CRT) to replace the stretch IRA

Comments are closed.