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The Best of Both Worlds. Choosing beneficiaries of IRA’s (IRA’s will be the term used for all qualified plans,
except where otherwise noted) has been the subject to our two previous newsletters. For many clients, the
good news is that they have large IRA balances. The bad news that income taxes have to be paid on those
balances when they are withdrawn from the plan. This is where is the white knight comes galloping in to save
the taxpayer in distress in the form of the CRT -Charitable Remainder Trust.
The CRT is a creature of the Internal Revenue Code and its regulations that gets special treatment. A
percentage payout is distributed to a family member or family members over a defined period, lifetimes or
term of years, with remainder to charity.
CRT’s are Tax Exempt. The beauty of this solution is that a CRT, properly crafted, is itself a tax exempt entity
and can withdraw IRA assets, free of income tax. These distributions can be invested, by the CRT, free of tax
on the earnings, just like the investments of any tax exempt entity. The CRT can define the distributions to a
spouse and/or children, either as annuity payments or as "unitrust" payments. An annuity is a percentage of
the initial value of the Trust assets. The Unitrust payment is a fixed percentage of the fluctuating value of trust
assets determined annually. Thus, the plan owner through his or her estate plan can determine the destiny of
the plan and the use of the plan assets without constraints of the minimum distribution rules and the plan
provisions. Here are some examples:
Payments to Spouse, Remainder to Charity. The plan owner wants to benefit a surviving spouse, but wants
any left over assets to go to charity. In reality the end result will be determined by the investment performance
of the underlying assets, how long the spouse lives, and the designated pay-out. The IRS minimum
requirement is a pay-out of at least five percent and that the charitable remainder (calculated based on
actuarial factors, interest rates and pay-outs) be at least ten percent of the initial amount of the Trust.
If there is any charitable intent at all, the CRT may be the perfect solution. Otherwise, the spouse may be
forced to withdraw larger and larger amounts from the IRA, as she gets older. As primary beneficiary, the
spouse controls the whole plan. The charity might get nothing. Sometimes in a second marriage the plan
owner may want his children to benefit as distributees after the spouse’s death, and the CRT is the perfect
way to control those distributions, with the only "downside" being the charitable remainder.
Special Needs Beneficiaries. The IRS has recently approved a CRT that made the annual payments to a
Special Needs Trust for a disabled beneficiary. This approach will bypass all of the income tax and
government benefit complexities involved with retirement plans. The CRT can take out all of the assets
without payment of any tax, provide for distributions during the lifetime of the disabled beneficiary (and include
other individual beneficiaries) so long as the minimum 10% remainder for the charity is achieved.
Money Managers and Financial Advisors. Many of the IRA complexities are avoided by using a CRT to
accomplish complex financial and personal objectives, consistent with an overall estate plan. Thus, CRT
assets can be retained in management by the Trustee without diminution for payment of income taxes.
Change of Charitable Beneficiaries. The CRT can be drafted so that the charitable beneficiaries can be
changed and/or specified by succeeding family members, without affecting the overall validity of the plan. This
enables surviving spouse and/or future generations to participate in philanthropy, if the plan owner
determines that this flexibility will be in the best interests of the family.
Conclusion. CRT’s can be a valuable device to achieve estate planning objectives with a maximum of control
and a minimum of tax. Of course, the individual recipient of the CRT annual distributions will have to pay
income tax on those amounts, but that would be the case anyway and the timing and disposition of these
annual payments can be controlled by the plan owner, not by others or the Internal Revenue Code.
If you have clients who would benefit from a no-obligation discussion of this valuable alternative for their
estate plan, please contact Jim Modrall at 941-9660. There is no charge for the initial consultation.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| February 2004 IRA’s - CHARITABLE REMAINDER TRUSTS AND BENEFICIARIES by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |