Using A Charitable Remainder Trust As A Beneficiary

By Brett Danko

Charitable remainder trusts allow an IRA owner to pass down their IRA to individuals over their lifetime (similar to an annuity), not forcing the distributions over 10 years as is the new law for individuals dying after 2019.The charitable remainder trusts will not pay taxes but pay out a minimum of 5% each year to the beneficiaries until death (the beneficiaries pay taxes on the distributions). The remaining assets will be paid to a charity after the beneficiary’s death (usually not a spouse).

Charitable Remainder Annuity Trusts (CRATs) pay out a specified amount based on the initial amount placed inside the trust (for example 5% or $50,000 if $1M were placed in the CRAT each year as the amount would not change).CRUTS are valued each year and specific percentage(at least 5%) is paid out each year. For example, if $1M were placed in the trust using 5%, then $50,000 would be paid out in the first year. If the CRUT was worth $2M beginning the second year, then $100,000 (5% of $2M) would be paid the second and so on as the CRUT would be revalued each year. Below is a breakdown of the advantages and disadvantages of utilizing a charitable remainder trust (CRAT/CRUT) as an IRA beneficiary.

Advantages of charitable remainder trusts (CRAT/CRUT):

1. Allows person to stretch out payments to beneficiary over the beneficiary’s lifetime. This option for IRAs (without a charitable remainder trust beneficiary) was discontinued after 2019.THIS IS THE MAIN REASON TO UTILIZE A CRAT/CRUT.

2. Taxes are paid by the beneficiary as received (not fully taxed in 10 years as IRA is distributed)

3. Similar to an annuity and allows CRAT/CRUT beneficiary to NOT touch the principal (this can also be a disadvantage –see below)

4. Allows IRA owner to give $$$ to children/beneficiaries and have $$$ flow to a charity after the death of the beneficiary.

Disadvantages of charitable remainder trusts (CRAT/CRUT):

1. If beneficiary dies early, no $$$ for the next generation (also difficult if the beneficiary are under 30 at the account owner’s death, i.e. naming youngish grandchildren could be an issue). If the beneficiary is healthy, a term life policy could be purchased in case the person dies early.

2. Can NOT give lump sums, ONLY the minimum 5% distributions each year (can be an advantage as well)

3. Even if beneficiary lives a long life, the remaining assets in the CRAT/CRUT will pass to a charity, not to living relatives such a grandchildren or great grandchildren

4. Added complexity to set up plus additional costs of $5-8K to set up and annual costs of $1-3K/year. Also will need to find a trustee and possible successor trustee which can add costs.

In general, this can be a very good solution for wealthy clients and/or clients with large IRAs (over $500K).Clients can get around the taxable IRA distribution over 10 years for traditional/pre-tax IRAs leaving the assets to the children/grandchildren (usually NOT a spouse).It is helpful if other assets are available to be inherited by the beneficiaries since they will not have access to the principal in the CRAT/CRUT.

Other possible solutions:

1. Convert the traditional IRA to a Roth IRA over time. The beneficiary will still have to distribute the Roth IRA over 10 years, BUT it will be tax-free. You can also put the Roth IRA in a regular trust (not charitable) and pay out to the beneficiary a certain percentage over time.

2. Create two beneficiaries for the traditional IRA –one for the charitable remainder trust and one for the children/grandchildren. This solution will simply allow the beneficiary to distribute the IRA over 10 years (will be taxable to beneficiary if a traditional IRA).This is especially true if the beneficiaries are in the low/medium tax bracket and there are few other assets to give outright at death.

Consult with your estate attorney and tax advisor as they will be able to comment on this topic more specifically