SECURE Act Estate Planning: T-IRA to Beneficiary vs CRUT?

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Phil DeMuth
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SECURE Act Estate Planning: T-IRA to Beneficiary vs CRUT?

Post by Phil DeMuth » Sat Jan 11, 2020 3:03 pm

Has anyone looked at the pros/cons of using a CRUT vs. naming a person as the IRA beneficiary?

I have seen cherry-picked "illustrations" showing the supposed advantage of the CRUT but no data on under what circumstances it is financially advantageous as a family wealth-transfer vehicle.

When do the breakevens with a direct IRA bequest come when using reasonable assumptions for tax rates and investment returns? It makes a big difference if the CRUT can win in twenty years vs forty years.

123
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Re: SECURE Act Estate Planning: T-IRA to Beneficiary vs CRUT?

Post by 123 » Sat Jan 11, 2020 3:08 pm

From Wikipedia, the free encyclopedia

"A charitable remainder unitrust (known as a "CRUT") is an irrevocable trust created under the authority of Internal Revenue Code § 664[1] ("Code"). This special, irrevocable trust has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets (on an annual or more frequent basis) to a non-charitable beneficiary (which is considered the settlor of the trust); and (2) At the expiration of a specified time (usually the death of the settlor), the remaining balance of the CRUTs assets are distributed to charity. The trustee determines the fair market value of the CRUT's assets at the time of contribution, and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT. Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust."

I would suspect that if there are any significant loopholes in the provisions of the SECURE Act that there could be subsequent legislation to close them. It has happened before.
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bsteiner
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Re: SECURE Act Estate Planning: T-IRA to Beneficiary vs CRUT?

Post by bsteiner » Sat Jan 11, 2020 4:27 pm

Phil DeMuth wrote:
Sat Jan 11, 2020 3:03 pm
Has anyone looked at the pros/cons of using a CRUT vs. naming a person as the IRA beneficiary?

I have seen cherry-picked "illustrations" showing the supposed advantage of the CRUT but no data on under what circumstances it is financially advantageous as a family wealth-transfer vehicle.

When do the breakevens with a direct IRA bequest come when using reasonable assumptions for tax rates and investment returns? It makes a big difference if the CRUT can win in twenty years vs forty years.
Phil,

We just discussed this yesterday. I wrote an article on it for Leimberg (available at leimbergservices.com, but it's a paid subscription service) which I'll send you. I'm also writing an article on it for a print publication which will probably be published in April and which I'll probably be able to post online in June.

A CRT is tax-exempt. It will collect the entire IRA at once, and distribute to the beneficiary a percentage (at least 5%) of the value of the trust each year. Upon the beneficiary's death, the balance goes to charity. The actuarial value of the charity's remainder interest has to be at least 10% of the initial value. So at current interest rates you can't do a CRT for the life of a person under age 27 (though you can do a 20-year CRT for a person of any age).

The benefit of being able to replicate the stretch will usually approximately offset the loss of the remainder interest to charity.

So I think this will become a popular technique.

The disadvantages are that the payments are inflexible and have to go to the beneficiary outright rather than being accumulated in trust so they'll be included in the beneficiary's estate and subject to the beneficiary's creditors and divorcing spouses, and Medicaid.

This works best for beneficiaries who will need distributions, are unlikely to have taxable estates, and are at low risk of creditors and divorcing spouses. It's also helpful if there's some other money (either from the IRA owner or the beneficiary's own money) available to provide for any one-off needs. I think this will apply in a large number of cases. I'm already doing one now.

Since the SECURE Act allows a 10-year stretch, you probably wouldn't do a CRT for 20 years, or for the life of someone only expected to live for 20 years. But the beneficiary doesn't have to live for 40 years for the family to be better off if the IRA owner leaves the IRA to a CRT rather than to or in trust for the beneficiary without a CRT. You could show this on an Excel spreadsheet, making reasonable assumptions as to the investment return in the CRT and outside the CRT, tax rates, and how long the beneficiary is expected to live. I think the breakeven point is at some number of years more than 20 but less than 40, though it will vary depending on the assumptions and how long the beneficiary lives. You can hedge against the beneficiary dying early by buying life insurance on the beneficiary's life (which the beneficiary might do if he/she has a family dependent on the CRT payments). If the beneficiary is relatively young, the insurance won't be very expensive.

An IRA owner whose grandchildren are over 27 but still in their 30s or 40s might leave the IRA to CRTs for his/her grandchildren, assuming his/her children are otherwise provided for.

Some people may recall that before the IRS overhauled the 1987 proposed regulations in 2001, IRA owners had to choose between term certain and recalculation. If an IRA owner elected recalculation and didn't have a spouse beneficiary, the entire IRA was payable by the end of the year after death, with no stretch. A CRT was the workaround.

indyfish
Posts: 44
Joined: Wed Jan 09, 2013 8:22 am

Re: SECURE Act Estate Planning: T-IRA to Beneficiary vs CRUT?

Post by indyfish » Tue Jan 14, 2020 7:38 am

bsteiner wrote:
Sat Jan 11, 2020 4:27 pm
Phil DeMuth wrote:
Sat Jan 11, 2020 3:03 pm
Has anyone looked at the pros/cons of using a CRUT vs. naming a person as the IRA beneficiary?

I have seen cherry-picked "illustrations" showing the supposed advantage of the CRUT but no data on under what circumstances it is financially advantageous as a family wealth-transfer vehicle.

When do the breakevens with a direct IRA bequest come when using reasonable assumptions for tax rates and investment returns? It makes a big difference if the CRUT can win in twenty years vs forty years.
Phil,

We just discussed this yesterday. I wrote an article on it for Leimberg (available at leimbergservices.com, but it's a paid subscription service) which I'll send you. I'm also writing an article on it for a print publication which will probably be published in April and which I'll probably be able to post online in June.

A CRT is tax-exempt. It will collect the entire IRA at once, and distribute to the beneficiary a percentage (at least 5%) of the value of the trust each year. Upon the beneficiary's death, the balance goes to charity. The actuarial value of the charity's remainder interest has to be at least 10% of the initial value. So at current interest rates you can't do a CRT for the life of a person under age 27 (though you can do a 20-year CRT for a person of any age).

The benefit of being able to replicate the stretch will usually approximately offset the loss of the remainder interest to charity.

So I think this will become a popular technique.

The disadvantages are that the payments are inflexible and have to go to the beneficiary outright rather than being accumulated in trust so they'll be included in the beneficiary's estate and subject to the beneficiary's creditors and divorcing spouses, and Medicaid.

This works best for beneficiaries who will need distributions, are unlikely to have taxable estates, and are at low risk of creditors and divorcing spouses. It's also helpful if there's some other money (either from the IRA owner or the beneficiary's own money) available to provide for any one-off needs. I think this will apply in a large number of cases. I'm already doing one now.

Since the SECURE Act allows a 10-year stretch, you probably wouldn't do a CRT for 20 years, or for the life of someone only expected to live for 20 years. But the beneficiary doesn't have to live for 40 years for the family to be better off if the IRA owner leaves the IRA to a CRT rather than to or in trust for the beneficiary without a CRT. You could show this on an Excel spreadsheet, making reasonable assumptions as to the investment return in the CRT and outside the CRT, tax rates, and how long the beneficiary is expected to live. I think the breakeven point is at some number of years more than 20 but less than 40, though it will vary depending on the assumptions and how long the beneficiary lives. You can hedge against the beneficiary dying early by buying life insurance on the beneficiary's life (which the beneficiary might do if he/she has a family dependent on the CRT payments). If the beneficiary is relatively young, the insurance won't be very expensive.

An IRA owner whose grandchildren are over 27 but still in their 30s or 40s might leave the IRA to CRTs for his/her grandchildren, assuming his/her children are otherwise provided for.

Some people may recall that before the IRS overhauled the 1987 proposed regulations in 2001, IRA owners had to choose between term certain and recalculation. If an IRA owner elected recalculation and didn't have a spouse beneficiary, the entire IRA was payable by the end of the year after death, with no stretch. A CRT was the workaround.
I read an article on Forbes on this (https://www.forbes.com/sites/bobcarlson ... 0bacec6564), and I have been looking for other articles on CRUT. Are there other articles online that talk about this, specifically for talking about naming the beneficiary of the IRA/401k/403b as the charity, and the two-life beneficiary of the CRUT?

bsteiner
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Location: NYC/NJ/FL

Re: SECURE Act Estate Planning: T-IRA to Beneficiary vs CRUT?

Post by bsteiner » Tue Jan 14, 2020 8:51 am

indyfish wrote:
Tue Jan 14, 2020 7:38 am
...
I read an article on Forbes on this (https://www.forbes.com/sites/bobcarlson ... 0bacec6564), and I have been looking for other articles on CRUT. Are there other articles online that talk about this, specifically for talking about naming the beneficiary of the IRA/401k/403b as the charity, and the two-life beneficiary of the CRUT?
The article makes sense now but didn't make sense when it was published. After the proposed regulations were overhauled in 2001 until this year, you didn't need a charitable remainder trust to replicate the stretch since you got the stretch without it. Under the SECURE Act, a CRT replicates the stretch, though at some cost (the value of the charity's remainder interest) and some loss of flexibility (see my response to Phil DeMuth in this thread).

I think this will become a popular technique.

You won't find much written about this. Until now, we used CRTs mainly to be able to sell appreciated assets and diversify without current capital gains tax, and occasionally for deferred compensation payable in a lump sum upon death. But IRAs are far more common.

As I mentioned in my response to Phil in this thread, I wrote an article on this for Leimberg (at leimbergservices.com, but it's a paid service). I'm also writing an article on this for a print publication, which will probably be published in April and which I'll probably be able to post online in June. But basically the concept is as described in my response to Phil in this thread.

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