Can a Charitable Remainder Trust Include an IRA?

Charitable Remainder Trust
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A Charitable Remainder Trust can be a tax-efficient means of passing on your IRA when you die.

You have been saving for retirement for most, if not all, of your working years.

Each year you have set aside a portion of your paycheck into a company-sponsored retirement plan or a traditional Individual Retirement Account (IRA).

Upon retirement, you may have transferred your company-sponsored plan into a personal, self-directed IRA.

You had planned to pass this IRA to your children when you die.

According to a recent Kiplinger article titled “Worried about Passing Down a Big IRA? Consider a CRT,” this plan may now come with serious tax consequences.

Charitable Remainder Trust can help with the death of the “stretch IRA.”
A Charitable Remainder Trust is a flexible alternative to the now-extinct “stretch IRA.”

Using a Charitable Remainder Trust may be better.

Why?

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) went into effect on January 1, 2020.

Before the SECURE Act, a viable estate planning option was to leave the IRA to a non-spousal beneficiary and allow this person to take an extended stretch payout over his or her lifetime.

The SECURE Act set a limit on how long the funds could remain in the traditional IRA.

A non-spouse must now withdrawal all funds from the IRA within 10 years of date of death of the original owner.

Although there are a few exceptions for minors, the disabled, or the chronically ill, the “stretch IRA” has been effectively eliminated.

As a result, your children may face a large income tax bill.

Should you simply give up on using a traditional IRA or contributing to your 401(k)?

No.

These are still helpful tools for retirement savings.

What can you do?

You can create a Charitable Remainder Trust.

The trust provides fixed amount or fixed percentage distributions to beneficiaries for life or for a term of less than 20 years.

Any assets remaining in the trust at the end of its term will be paid to one or more charities.

With a Charitable Remainder Annuity Trust, the trust gives a fixed percentage of the trust assets at the time of creation to the current individual beneficiaries and the remainder is given to charity.

Another type of Charitable Remainder Trust is a Charitable Remainder Unitrust.

With this trust the amount distributed to the individual beneficiaries varies each year based on the value of the trust itself.

For both “flavors” of the Charitable Remainder Trusts, the remainder interest of the charity must be at least 10 percent of the trust value at its inception.

A Charitable Remainder Trust can minimize the tax liability for beneficiaries who receive other income and can protect the IRA assets from creditors,  lawsuits, or divorce in the life of a beneficiary.

An experienced estate planning attorney will help you determine whether a Charitable Remainder Trust would work with (rather than against) your comprehensive estate plan.

Reference: Kiplinger (Feb. 8, 2021) “Worried about Passing Down a Big IRA? Consider a CRT”

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