Conclusions: tIRAs, trusts, and the SECURE Act

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restingonmylaurels
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Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

I wanted to wrap up the topic of succession plan revisions necessitated by the SECURE Act, for a trust as a tIRA beneficiary. Any substantial tIRA should have a trust as its beneficiary, for many reasons discussed elsewhere (creditors, inexperienced beneficiaries, disability, etc.).

The current question is, which of the trust types discussed in recent threads; conduit trust, accumulation trust, and charitable remainder unitrust (CRUT), works the best in a typical scenario. I modeled that scenario based on the following assumptions:
  • • A 40 year-old single, able child is the beneficiary of her parent’s $1m Inherited IRA trust.
    • The child has a salary of $99k, meaning any tIRA proceeds she receives will be taxed at the 24% rate and upwards.
    • tIRA distributions coming into and remaining in the trust are taxed at the 37% rate.
    • The trusts/tIRA invests in a tax-managed market index fund with unrealized annual growth of 5%, net of trustee fees.
    • The accumulation trust has to sell 2/5 of the 5% growth (net of capital gains tax) to distribute to the beneficiary at December 31 each year.
    • The CRT values itself on January 1 each year.
    • The CRT has to sell all 5% of its January 1 value (no capital gains tax) to distribute to the beneficiary at December 31 each year.
    • The accumulation trust and CRUT are terminated at either 20 years or 40 years.
What is the view, at trust termination, 20 and 40 years after the death of the grantor/tIRA owner, as to which trust choice was superior? The evaluation criteria: the average and ending funds protected within the trust (or tIRA), the total after-tax funds received by the beneficiary, and any charitable donations made.

Model A
Results:
1. The conduit trust has to take out the tIRA distributions over 10 years, so current balance/remaining years is withdrawn annually, except in the final year, when the entire remaining balanced must be withdrawn. After 20 (and 40) years, the average funds protected were $0.33m ($0.17m), the ending funds protected were $0 as the tIRA was fully distributed to the beneficiary, the beneficiary received after-tax $0.97m after 10 years, and charities received $0.

2. The accumulation trust has to receive tIRA distributions by either 5 or 10 years but as the tax rate is always the same, the funds are removed in year 1. The amount of funds coming into the trust is an after-tax $630k (37% tax rate). This trust allows 2/5 of the 5% growth to be sold and distributed to the beneficiary as a capital gain. After 20 (and 40) years, the average funds protected were $0.90m ($1.24m), the beneficiary has received after-tax $0.29m ($0.81m), and charities have received $0. The trust had accumulated funds of $1.14m ($2.06m).

3. The CRUT takes out the tIRA distributions immediately and pays no tax on the distribution. The funds in the CRT are paid at 5% of the trust’s beginning of year value and the beneficiary receives that net of tax. After 20 (and 40) years, the average funds protected were $1.0m ($1.0m), the beneficiary has received an after-tax $0.76m ($1.52m), and charities will receive $1.0m, the trust’s ending balance.

Findings:
  • A. Over 20 years, the conduit trust provides more money into the hands of beneficiary before trust defunding, the accumulation trust ends up with the most funds still under trust, and the CRT has the highest average funds under trust and of course the only charitable donation.

    B. Over 40 years, the accumulation trust has the highest average and ending funds still under trust (despite distributing 40% of its growth) and the CRUT provides the most money into the hands of the beneficiary before trust defunding and the only charitable donation.

    C. The trust defunding at termination is key for getting money to the beneficiary but it happens only at termination. The conduit trust terminated after year 10 with no funds remaining. The CRT terminates in either year 20 or 40, distributing its remainder to charity. The accumulation trust pays its remainder to the beneficiaries at either year 20 or 40. After 10 years, the conduit trust has paid the beneficiary after-tax $0.97m. The CRT paid the beneficiary after-tax $0.76m (20 years) and $1.52m (40 years) and will pay the charity $1m. The accumulation trust, using an blended 18% defunding capital gains tax rate, paid the beneficiary after-tax $1.33m (20 years) and $2.61m (40 years).
Model B
To make up for the fact that the CRT gets an estate tax deduction for the actuarial value of the remainder interest, I had the tIRA donate 10% of their funds to charity before distributions to the conduit or accumulation trusts. While the actuarial amounts are similar, the total dollar amounts are significantly different, due to the timing of the donation. This pre-tax donation did not affect the relative results described above, so there should be more room available for the accumulation trust to increase its charitable donations.

Model C
Because the funds reach the beneficiary at different times in varying amounts, it would be useful to look at invested monies both inside and outside the trust. Using the assumption that 50% of the monies distributed to beneficiaries is spent on necessaries and the other 50% is reinvested with a growth rate not burdened by the trustee fee, the results show the same pattern, that total funds to the beneficiary, both in trust and in their own re-invested funds, is highest with the accumulation trust.

Conclusions:
The CRT ends up with more total funds available, but a significant portion of those are ear-marked for charity. That is the crux of the analysis, that the CRT has more total funds because of its tax exempt status but the accumulation trust pays more funds to the beneficiary over its lifetime and protects a larger amount of funds for longer periods of time.

There are also variations worth modelling. One would look for timing impacts on the beneficiary distributions, e.g. the conduit trust’s distributions all come within the first 10 years, instead of over 20 or 40 years and trust defunding. Another is leaving funds in the tIRA for 10 years before distribution to the accumulation trust, avoiding beneficiary distributions for 10 years. Conversely, the accumulation trust could both increase its payouts to the beneficiary and still leave a charitable donation with some part of the final trust balance.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by bsteiner »

Conduit trusts rarely made sense under the old law, and rarely make sense now except for eligible designated beneficiaries such as spouses and persons not more than 10 years younger. They force out all of the IRA distributions. With a discretionary (accumulation) trust, if the trustees think it's best to make distributions, they may do so. However, if they think that, notwithstanding income taxes, it's best to accumulate some or all of the IRA distributions in a given year, they have that option.

A charitable remainder trust works well if the beneficiary is relatively young (but at least 28), is likely to need some distributions, has some other money available for one-off needs, is unlikely to have a taxable estate, and is at low risk of creditors and spouses. The benefit of replicating the stretch will often offset the loss of 10% of the value to charity (the present value of the charity's remainder interest has to be at least 10% of the initial value of the trust). See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.

You would compare the options by making reasonable assumptions as to investment returns, tax rates, and how long the beneficiary will live, and then comparing how much money there would be after taxes at the beneficiary's death.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

BTW, I should add that although I am a lawyer, I got involved in this exercise for my personal succession planning only. This is not my practice area, people like Bruce Steiner are the people to turn to with questions. I am just sharing my experiences and thought processes of the past two weeks, as they happened. I wanted to share so that others who have not updated the succession plans in 2020-21 post-SECURE Act would have some further insights into analyzing the choices in this now more confusing area of succession law. I have made my choice now and so need to get drafting :!: :idea:
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

Unless you have need to place the assets in trust, the math is clearly on the side of leaving it directly. If a trust is needed, the purpose for needing the trust is going to outweigh trying to maximize any financial efficiency.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Alan S. »

With respect to creditor protection for inherited IRAs, see following chart. Normally, for your beneficiaries you would not want to have the protection limited to a BK filing.

https://www.actec.org/assets/1/6/50_STA ... _CHART.pdf
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by RetiredCSProf »

restingonmylaurels wrote: Sat Apr 17, 2021 6:16 am I wanted to wrap up the topic of succession plan revisions necessitated by the SECURE Act, for a trust as a tIRA beneficiary. Any substantial tIRA should have a trust as its beneficiary, for many reasons discussed elsewhere (creditors, inexperienced beneficiaries, disability, etc.).
...
You lost me on the 2nd sentence. What is a "substantial" tIRA?" Your examples are with a tIRA of $1M with one non-spousal beneficiary. At one point is a tIRA considered to be substantial enough to need a trust? And what if beneficiary is not yet 28 years old?
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by celia »

I don’t know why you would make any trust be a beneficiary of an IRA. (What if she wants to disclaim all/part of it such as if her kids have lower tax brackets?) And how can you account for future tax law changes?

And did you notice the changes made under the SECURE Act are not yet understood? This thread was started late one night and soon shut down since IRS changes may be pending:
viewtopic.php?f=2&t=345973
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by bsteiner »

celia wrote: Sat Apr 17, 2021 11:02 pm I don’t know why you would make any trust be a beneficiary of an IRA. (What if she wants to disclaim all/part of it such as if her kids have lower tax brackets?) And how can you account for future tax law changes?
...
You might leave retirement benefits in trust for the same reasons you might leave other assets in trust: to keep them out of the beneficiaries' estates, to protect against the beneficiaries' creditors and spouses, and Medicaid, if a beneficiary can't handle assets for whatever reason, etc.

The tradeoff is that trusts are usually in higher tax brackets than individuals. However, if in any year the trustees think that income tax considerations outweigh the other factors, the trustees may make distributions.

It's often possible to set up a trust to avoid state income taxes. So if you have a beneficiary in a middle bracket in a high tax state, the tax cost of accumulating income in a trust at the top Federal bracket that's exempt from state income tax may not be very much.

Trusts facilitate making distributions to the next generation. For example, in the case of a trust for a child and his/her issue, the trustees could make distributions to the grandchildren if they think the children are otherwise provided for.

There's no way to predict future changes in the tax law, except that since the tax law has changed frequently in the past, it's safe to say it will continue to change in the future.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

Lee_WSP wrote: Sat Apr 17, 2021 7:09 pm Unless you have need to place the assets in trust, the math is clearly on the side of leaving it directly.
I do not concur with this statement, see Model C above. The funds that come out of the tIRA directly to a beneficiary are likely to be taxed to them at federal rates not that much lower than the trust, especially if they are paid directly. Even with a conduit trust taking RMDs in the most tax efficient manner possible over the longest period possible, the beneficiary is taxed at rates up to 35% in some years. Ten years is just not a lot of time to avoid the higher rates and that is assuming you use a conduit trust. If leaving it directly instead of to a trust, your beneficiary can and likely will take the funds out all at once, meaning you are easily into the 37% marginal tax bracket. And the accumulation trust will enforce some spending discipline by not distributing all of the proceeds, leading to higher asset growth over time which will eventually come back to the beneficiary.
Lee_WSP wrote: Sat Apr 17, 2021 7:09 pm If a trust is needed, the purpose for needing the trust is going to outweigh trying to maximize any financial efficiency.
I do not concur with this either, as both the advantages of trust protections and oversight and financial efficiencies are possible, with accumulation trusts and CRTs and variations thereof. First, I believe, and I again I do not practice in this area so am neutral about the answer, that a trust is the right answer in almost every situation. From a perspective of life experience, you as the grantor have the life experience, knowledge, and wherewithal to have saved, invested, and tax managed these investments well enough to make them worth planning around. Your beneficiary by definition cannot be as far down that path as you are, requiring the insights of experienced practitioners until they can catch up in experience, knowledge, and ability, to the grantor, so your funds are held in trust until they get there.

Second, there are all of the issues regarding protection from creditors and ex-spouses. Clark v. Rameker itself should make an attorney advise that a trust is a better answer in most all situations. Have a read: https://www.journalofaccountancy.com/is ... funds.html

Third, and perhaps most important, is a statistic I came across in my research over the last two weeks which I can't seem to locate again. One of the leading practitioners in this area stated that, in the vast majority of cases, heirs had spent their inherited funds within 30 months!! Think about that, you spend a lifetime building up your assets to leave a legacy and your heir blows it in 2.5 years. If that does not screen out for ongoing trustee oversight...
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

RetiredCSProf wrote: Sat Apr 17, 2021 10:16 pm
restingonmylaurels wrote: Sat Apr 17, 2021 6:16 am I wanted to wrap up the topic of succession plan revisions necessitated by the SECURE Act, for a trust as a tIRA beneficiary. Any substantial tIRA should have a trust as its beneficiary, for many reasons discussed elsewhere (creditors, inexperienced beneficiaries, disability, etc.).
...
You lost me on the 2nd sentence. What is a "substantial" tIRA?" Your examples are with a tIRA of $1M with one non-spousal beneficiary. At one point is a tIRA considered to be substantial enough to need a trust? And what if beneficiary is not yet 28 years old?
I intentionally did not define that "Substantial" as I think it is up to each person to determine that. I used a tIRA of $1m because the math is easier. All beneficiaries except one are non-spousal and your spouse will themselves only be able to leave it to a non-spousal beneficiary, so every trust will eventually have non-spousal beneficiaries.

You can see my comments in my prior post, but my strong belief is that you always need a trust in succession planning. There are just too many positive reasons, including those I listed above and its does not really cost that much to have one drafted by an attorney, as the provisions are relatively standard. Trust law has been around for a very long time, so except for when things like the SECURE Act come along, if well drafted you should not have to revise it much at all. The cost-benefit analysis heavily favors spending the small amount of money it takes to set up a trust, either living or testamentary.

The beneficiary being 28 years old is Bruce's calculation for the minimum age for a CRUT beneficiary to receive a lifetime stretch at current interest rates. If younger, a term of 20 years may have to be used. In general though, the younger the beneficiary, the more that a trust is required.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

celia wrote: Sat Apr 17, 2021 11:02 pm And did you notice the changes made under the SECURE Act are not yet understood? This thread was started late one night and soon shut down since IRS changes may be pending:
viewtopic.php?f=2&t=345973
As Bruce has address the first part of your query, I will answer the second part.

You linked to a thread that had the following quote regarding IRS publication 590-B:
Pages 11 and 12 provide an explanation and an example showing that beneficiaries would be subject to RMDs each year (as under the pre-SECURE Act rules) for years one through nine, and then the balance must be withdrawn in year 10. No one saw that coming! This doesn’t go along with the SECURE Act rules and committee reports, which seemed to indicate that the new 10-year rule would work like the old pre-SECURE Act five-year rule, with no annual distributions required.
While interesting to get some guidance, I am not sure how many people would actually avail themselves of waiting until year 10 to pull out their tIRA distributions, unless they are in the highest marginal tax bracket and are therefore indifferent to when they withdraw. Those in lower marginal tax brackets likely benefit from the RMD schedule.

In the modeling I did, the accumulation trust could use the exact model described in the IRS pub, as it is indifferent as to when the tIRA are distributed, as its marginal tax rate is always the same if it retains the funds. And it would want to follow the IRS pub example to the extent that its was distributing the tIRA proceeds to the beneficiary if it made any incremental difference to their marginal tax rate.

The models i used and the conclusions I draw from them still stand. The accumulation trust or the CRUT are the way to go, with the decision only concerning the quantity and timing of the grantor's charitable intent.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by celia »

OP, I just wanted you to be aware that the SECURE Act may not end up being as you think it is (thought it was).
restingonmylaurels wrote: Mon Apr 19, 2021 5:53 am While interesting to get some guidance, I am not sure how many people would actually avail themselves of waiting until year 10 to pull out their tIRA distributions, unless they are in the highest marginal tax bracket and are therefore indifferent to when they withdraw. Those in lower marginal tax brackets likely benefit from the RMD schedule.
And, the beneficiary tax brackets can change unexpectedly, unless they are already in the highest tax bracket. For example, we were in early retirement and doing Roth conversions when DH Inherited an IRA from his parents. The RMDs from that IRA took up space in our tax bracket that had previously been reserved for our own Roth conversions. So we had to decide if we wanted to bump up part of the Roth conversion into the next tax bracket or convert less.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am
Lee_WSP wrote: Sat Apr 17, 2021 7:09 pm If a trust is needed, the purpose for needing the trust is going to outweigh trying to maximize any financial efficiency.
I do not concur with this either, as both the advantages of trust protections and oversight and financial efficiencies are possible, with accumulation trusts and CRTs and variations thereof. First, I believe, and I again I do not practice in this area so am neutral about the answer, that a trust is the right answer in almost every situation. From a perspective of life experience, you as the grantor have the life experience, knowledge, and wherewithal to have saved, invested, and tax managed these investments well enough to make them worth planning around. Your beneficiary by definition cannot be as far down that path as you are, requiring the insights of experienced practitioners until they can catch up in experience, knowledge, and ability, to the grantor, so your funds are held in trust until they get there.

Second, there are all of the issues regarding protection from creditors and ex-spouses. Clark v. Rameker itself should make an attorney advise that a trust is a better answer in most all situations. Have a read: https://www.journalofaccountancy.com/is ... funds.html

Third, and perhaps most important, is a statistic I came across in my research over the last two weeks which I can't seem to locate again. One of the leading practitioners in this area stated that, in the vast majority of cases, heirs had spent their inherited funds within 30 months!! Think about that, you spend a lifetime building up your assets to leave a legacy and your heir blows it in 2.5 years. If that does not screen out for ongoing trustee oversight...
I don't see the disagreement. You're scenarios are all scenarios where a trust is needed/beneficial because the beneficiary for some reason or another is not trusted to manage their own financial affairs.

I do not disagree that a trust is usually a great answer. My previous posts on the matter bear this out. I do disagree about the beneficiary a little. At some point we have to let our children be their own person and either trust them or not. But that's a personal choice as opposed to cold hard numbers. No clearly right answer there.

Again, the protection from creditors (not exactly the best reason for a normal non-spendthrift person, but we'll go accept the scenario) and spouses is a reason for having the trust.

Yes, yet another reason to put assets in trust because you don't trust the beneficiary.

Lee_WSP wrote: Sat Apr 17, 2021 7:09 pm Unless you have need to place the assets in trust, the math is clearly on the side of leaving it directly.
I do not concur with this statement, see Model C above. The funds that come out of the tIRA directly to a beneficiary are likely to be taxed to them at federal rates not that much lower than the trust, especially if they are paid directly. Even with a conduit trust taking RMDs in the most tax efficient manner possible over the longest period possible, the beneficiary is taxed at rates up to 35% in some years. Ten years is just not a lot of time to avoid the higher rates and that is assuming you use a conduit trust. If leaving it directly instead of to a trust, your beneficiary can and likely will take the funds out all at once, meaning you are easily into the 37% marginal tax bracket. And the accumulation trust will enforce some spending discipline by not distributing all of the proceeds, leading to higher asset growth over time which will eventually come back to the beneficiary.
Okay, let's take a look at Model C
Model C
Because the funds reach the beneficiary at different times in varying amounts, it would be useful to look at invested monies both inside and outside the trust. Using the assumption that 50% of the monies distributed to beneficiaries is spent on necessaries and the other 50% is reinvested with a growth rate not burdened by the trustee fee **, the results show the same pattern, that total funds to the beneficiary, both in trust and in their own re-invested funds, is highest with the accumulation trust.
This is yet another scenario where the need to place the assets in trust is clearly articulated. The beneficiary will need the assets for their need spending. The grantor does not trust the beneficiary to manage their own assets, etc etc.

*Although personally, I fail to see how someone making $100-200k a year will *need* distributions for necessary life expenses.

** I disagree with the bolded assumption. Who is going to manage the beneficiary's money for free? The basic premise of this forum is that we manage our own money because 1) finding someone else to do it for free or close to free is unrealistic, and 2) we're all about eliminating fees because fees are the drag on the returns of Mr. Market.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by afan »

Having a trust does not require paying a trustee. The right beneficiaries can do this for themselves. Or, for much less money, have a law firm bill by the hour for administrative work and the beneficiary can manage the investments.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

afan wrote: Mon Apr 19, 2021 1:53 pm Having a trust does not require paying a trustee. The right beneficiaries can do this for themselves. Or, for much less money, have a law firm bill by the hour for administrative work and the beneficiary can manage the investments.
Yes, but since the trust comparisons are a protection/accumulation trust vs an outright beneficiary, making the assumption that the beneficiary will manage their own money kind of breaks the whole argument.

I have not done the math, but obviously paying a law firm for even 3 hours of billable work is going to present a rather large drag on any but the largest IRA's.

Obviously there is no one answer for all situations, but with a TIRA, unless you convert it before death, leaving it directly is going to net the beneficiary the most flexibility and dollars unless they are in need of a trust and the protections it provides.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by afan »

Call it $600/hour, X3=$1,800.
Assume $1M in the tIRA.

Use the worst tax approach and take all the money out in the first year. Net a little over $630,000. That is just under 0.3%. Not free but not a big drag.

This approach does not scale with the size of the trust.

For a $5M IRA the annual fee would be just under 0.06%. About the cost of an index fund.

Having the money in the accumulation trust gives the beneficiary more flexibility than receiving the money outright. They can take money when they need or want it but keep it protected otherwise. All they need is an independent trustee who can make distributions.

Once the beneficiary recieves the money outright they cannot recreate the situation they would have had with the accumulation trust. If they live in a DAPT state, they could create such a DAPT. They would face many constraints over funding it, look back periods, exception creditors and would have to use their lifetime exclusion to avoid gift taxes.

With an accumulation trust, all those problems go away. The beneficiary could be the sole trustee as long as they do not take distributions. They could bring in an independent trustee when they needed to take out money.

Better off with the accumulation trust than without it.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

Yet another "trust purpose". The first thing I said was if you need a trust, use a trust. Otherwise leaving a TIRA to a beneficiary is going to be more efficient*. There are plenty of good reasons for leaving assets in trust.

But once you made the decision to keep the assets in trust, the next question is going to be which type of trust and then how to minimize any tax consequences which gets into the personal finance question and there are very little generalities.

*Even in a worst case scenario for leaving assets directly, it's going to be a wash and only because either method is going to hit the top bracket. And in the event of a wash, the trust loses out because of the added costs (in terms of filings and other formalities). Unless you can save on state income taxes.

Again, if you need to leave assets in trust, leave them in trust.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

Lee_WSP wrote: Mon Apr 19, 2021 1:32 pm
restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am
Lee_WSP wrote: Sat Apr 17, 2021 7:09 pm Unless you have need to place the assets in trust, the math is clearly on the side of leaving it directly.
I do not concur with this statement, see Model C above. The funds that come out of the tIRA directly to a beneficiary are likely to be taxed to them at federal rates not that much lower than the trust, especially if they are paid directly. Even with a conduit trust taking RMDs in the most tax efficient manner possible over the longest period possible, the beneficiary is taxed at rates up to 35% in some years. Ten years is just not a lot of time to avoid the higher rates and that is assuming you use a conduit trust. If leaving it directly instead of to a trust, your beneficiary can and likely will take the funds out all at once, meaning you are easily into the 37% marginal tax bracket. And the accumulation trust will enforce some spending discipline by not distributing all of the proceeds, leading to higher asset growth over time which will eventually come back to the beneficiary.
Lee_WSP wrote: Mon Apr 19, 2021 1:32 pm Okay, let's take a look at Model C
restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am Model C
Because the funds reach the beneficiary at different times in varying amounts, it would be useful to look at invested monies both inside and outside the trust. Using the assumption that 50% of the monies distributed to beneficiaries is spent on necessaries and the other 50% is reinvested with a growth rate not burdened by the trustee fee **, the results show the same pattern, that total funds to the beneficiary, both in trust and in their own re-invested funds, is highest with the accumulation trust.
This is yet another scenario where the need to place the assets in trust is clearly articulated. The beneficiary will need the assets for their need spending. The grantor does not trust the beneficiary to manage their own assets, etc etc.

*Although personally, I fail to see how someone making $100-200k a year will *need* distributions for necessary life expenses.

** I disagree with the bolded assumption. Who is going to manage the beneficiary's money for free? The basic premise of this forum is that we manage our own money because 1) finding someone else to do it for free or close to free is unrealistic, and 2) we're all about eliminating fees because fees are the drag on the returns of Mr. Market.
OK, think we are mostly in agreement, let's discuss the latter points you raised. The term "necessaries" here, although it has a legal meaning, was only meant to signify spending, not investing. You complained on my earliest model that had the beneficiaries were investing all of their distributions, so this allowed them to spend half of what they received and invest the other half, a more likely scenario.

Regarding the "**" you disagreed with, recall that VNTC, for example, charges a trust administration fee of 0.25% and a PAS fee of 0.30%. So for the funds distributed to the beneficiary that they in turn reinvest, the assumption was that they are still be guided by PAS on their reinvested funds but no longer are incurring the trust administration fee. The funds outside the trust are therefore earning an extra 0.25% in the models I used. One could assume that they dropped the PAS fee as well, but I choose to retain it for modeling purposes, as it did not change the result.
Last edited by restingonmylaurels on Tue Apr 20, 2021 4:39 am, edited 1 time in total.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

afan wrote: Mon Apr 19, 2021 1:53 pm Having a trust does not require paying a trustee. The right beneficiaries can do this for themselves. Or, for much less money, have a law firm bill by the hour for administrative work and the beneficiary can manage the investments.
While true, that to me would defeat the purpose of the trust, as you are trying to restrict access to the funds for whatever period of time. Making the beneficiary the trustee would allow them to self deal, which could be hard to stop without significant restrictive provisions. A grantor acting as the trustee over funds that they generated has no conflict of interest but a beneficiary is quite different. And I wonder if a trustee with discretion over funds they alone control would truly be protected from creditors. At a minimum you would be looking at co-trusteeship with a corporate trustee and then you are right back where we started. Just better to keep those roles separate, knowing there is a price to pay for independence.

Also, the other big advantage of a professional trustee besides their independence is their knowledge and experience in dealing with investing, taxation, and changing laws. While there may be a few beneficiaries with comparable skills, it would not seem to be be that common, especially with younger beneficiaries, and a second opinion should be desirable. The beneficiary will get a significant chance to manage the monies that are distributed from the trust to them, so they will be busy enough with that.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

Alan S. wrote: Sat Apr 17, 2021 7:39 pm With respect to creditor protection for inherited IRAs, see following chart. Normally, for your beneficiaries you would not want to have the protection limited to a BK filing.

https://www.actec.org/assets/1/6/50_STA ... _CHART.pdf
This is really useful. I would think of these state creditor laws as a second level of defense, but use the trust provisions and structure as the first level.

There is no telling when state statutes could be quickly and quietly changed. I mean, some state could try to suddenly restrict the rights of Americans to vote in a democratic society... oh, wait...
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

celia wrote: Mon Apr 19, 2021 11:26 am OP, I just wanted you to be aware that the SECURE Act may not end up being as you think it is (thought it was).
restingonmylaurels wrote: Mon Apr 19, 2021 5:53 am While interesting to get some guidance, I am not sure how many people would actually avail themselves of waiting until year 10 to pull out their tIRA distributions, unless they are in the highest marginal tax bracket and are therefore indifferent to when they withdraw. Those in lower marginal tax brackets likely benefit from the RMD schedule.
And, the beneficiary tax brackets can change unexpectedly, unless they are already in the highest tax bracket. For example, we were in early retirement and doing Roth conversions when DH Inherited an IRA from his parents. The RMDs from that IRA took up space in our tax bracket that had previously been reserved for our own Roth conversions. So we had to decide if we wanted to bump up part of the Roth conversion into the next tax bracket or convert less.
There will certainly be PLRs and Treasury regs that clear up things on the SECURE Act over time, including hopefully the discriminatory treatment of accumulation trusts with a charitable remainder beneficiary (which counts, therefore not a see-through trust and only a 5-year stretch) vis a vis a conduit trust with a charitable remainder beneficiary (which is only a mere potential successor, does not count, it is a see-through trust and gets a 10-year stretch).

The good thing about an accumulation trust, as Bruce alluded to above, is the ability of the trustee to adjust distributions based on the current year's tax situation. So tax brackets, Treasury regs, and IRS interpretations may change but the professional trustee is there to handle it all for the beneficiary.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

restingonmylaurels wrote: Tue Apr 20, 2021 4:17 am
Lee_WSP wrote: Mon Apr 19, 2021 1:32 pm
restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am
Lee_WSP wrote: Sat Apr 17, 2021 7:09 pm Unless you have need to place the assets in trust, the math is clearly on the side of leaving it directly.
I do not concur with this statement, see Model C above. The funds that come out of the tIRA directly to a beneficiary are likely to be taxed to them at federal rates not that much lower than the trust, especially if they are paid directly. Even with a conduit trust taking RMDs in the most tax efficient manner possible over the longest period possible, the beneficiary is taxed at rates up to 35% in some years. Ten years is just not a lot of time to avoid the higher rates and that is assuming you use a conduit trust. If leaving it directly instead of to a trust, your beneficiary can and likely will take the funds out all at once, meaning you are easily into the 37% marginal tax bracket. And the accumulation trust will enforce some spending discipline by not distributing all of the proceeds, leading to higher asset growth over time which will eventually come back to the beneficiary.
Lee_WSP wrote: Mon Apr 19, 2021 1:32 pm Okay, let's take a look at Model C
restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am Model C
Because the funds reach the beneficiary at different times in varying amounts, it would be useful to look at invested monies both inside and outside the trust. Using the assumption that 50% of the monies distributed to beneficiaries is spent on necessaries and the other 50% is reinvested with a growth rate not burdened by the trustee fee **, the results show the same pattern, that total funds to the beneficiary, both in trust and in their own re-invested funds, is highest with the accumulation trust.
This is yet another scenario where the need to place the assets in trust is clearly articulated. The beneficiary will need the assets for their need spending. The grantor does not trust the beneficiary to manage their own assets, etc etc.

*Although personally, I fail to see how someone making $100-200k a year will *need* distributions for necessary life expenses.

** I disagree with the bolded assumption. Who is going to manage the beneficiary's money for free? The basic premise of this forum is that we manage our own money because 1) finding someone else to do it for free or close to free is unrealistic, and 2) we're all about eliminating fees because fees are the drag on the returns of Mr. Market.
OK, think we are mostly in agreement, let's discuss the latter points you raised. The term "necessaries" here, although it has a legal meaning, was only meant to signify spending, not investing. You complained on my earliest model that had the beneficiaries were investing all of their distributions, so this allowed them to spend half of what they received and invest the other half, a more likely scenario.

Regarding the "**" you disagreed with, recall that VNTC, for example, charges a trust administration fee of 0.25% and a PAS fee of 0.30%. So for the funds distributed to the beneficiary that they in turn reinvest, the assumption was that they are still be guided by PAS on their reinvested funds but no longer are incurring the trust administration fee. The funds outside the trust are therefore earning an extra 0.25% in the models I used. One could assume that they dropped the PAS fee as well, but I choose to retain it for modeling purposes, as it did not change the result.
I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by senex »

restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am First, I believe, and I again I do not practice in this area so am neutral about the answer, that a trust is the right answer in almost every situation.
restingonmylaurels wrote: Tue Apr 20, 2021 4:50 am So tax brackets, Treasury regs, and IRS interpretations may change but the professional trustee is there to handle it all for the beneficiary.
If you are suggesting that a professionally managed trust is the right answer in almost every situation, then your math is wrong. There are a variety of situations in which the expected monetary value of the nontrust is substantially higher. And that is ignoring the psychological and emotional elements, which cause some sources to report a majority of beneficiaries find their trusts to be a net negative.

Those quotes are from different messages, so maybe you weren't trying to make that point.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

Lee_WSP wrote: Tue Apr 20, 2021 11:58 am I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
If this is your belief, then no trust would ever make sense, as a trust by definition retains funds that could be in the hands of the beneficiary. An accumulation trust cannot just keep accumulating for the entire life of the beneficiary but needs to wisely share the benefits with the beneficiary.

It is not a case of half-trusting by distributing half of the tIRA proceeds. It is an attempt at balancing, without making the model overly complex, the needs of the beneficiary and the wishes of the grantor. A real-world trustee would need to keep making these decisions continually, instead of setting it up once as in the model. That is what they are paid for, to balance all of these things while operating under the standards of trusteeship.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

senex wrote: Wed Apr 21, 2021 12:19 pm
restingonmylaurels wrote: Mon Apr 19, 2021 5:13 am First, I believe, and I again I do not practice in this area so am neutral about the answer, that a trust is the right answer in almost every situation.
restingonmylaurels wrote: Tue Apr 20, 2021 4:50 am So tax brackets, Treasury regs, and IRS interpretations may change but the professional trustee is there to handle it all for the beneficiary.
If you are suggesting that a professionally managed trust is the right answer in almost every situation, then your math is wrong. There are a variety of situations in which the expected monetary value of the nontrust is substantially higher. And that is ignoring the psychological and emotional elements, which cause some sources to report a majority of beneficiaries find their trusts to be a net negative.

Those quotes are from different messages, so maybe you weren't trying to make that point.
There have been several threads and lots of posts on this topic recently. This one concerns the use of a a trust in the context of the receipt of tIRA proceeds by a non-spouse.

The expected monetary value of the nontrust could be higher but that is like saying you can outperform the stock market. Sure, the right person might but on average, most beneficiaries are probably not better at dealing with investing and taxes than a professional trustee should be.

On top of that, it is the grantor's wishes, not those of the beneficiary, that control the situation and the trustee has to work within those guidelines.

Happy to review your models showing how the average beneficiary in the typical situation will prevail monetarily.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

restingonmylaurels wrote: Thu Apr 22, 2021 6:57 am
Lee_WSP wrote: Tue Apr 20, 2021 11:58 am I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
If this is your belief, then no trust would ever make sense, as a trust by definition retains funds that could be in the hands of the beneficiary. An accumulation trust cannot just keep accumulating for the entire life of the beneficiary but needs to wisely share the benefits with the beneficiary.

It is not a case of half-trusting by distributing half of the tIRA proceeds. It is an attempt at balancing, without making the model overly complex, the needs of the beneficiary and the wishes of the grantor. A real-world trustee would need to keep making these decisions continually, instead of setting it up once as in the model. That is what they are paid for, to balance all of these things while operating under the standards of trusteeship.
You’re misunderstanding my position. I believe in trusting the beneficiary and not mandating control from beyond the grave.

As such, if you have a spendthrift beneficiary in need of such safeguards, your model should not assume they’ll do anything other than spend the distributions. Which gets to why it’s not easy to make these models in the first place.

If on the other hand, the beneficiary is competent, you’re usually better off leaving the trad ira directly or coming up with a different plan.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

Lee_WSP wrote: Thu Apr 22, 2021 9:11 am
restingonmylaurels wrote: Thu Apr 22, 2021 6:57 am
Lee_WSP wrote: Tue Apr 20, 2021 11:58 am I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
If this is your belief, then no trust would ever make sense, as a trust by definition retains funds that could be in the hands of the beneficiary. An accumulation trust cannot just keep accumulating for the entire life of the beneficiary but needs to wisely share the benefits with the beneficiary.

It is not a case of half-trusting by distributing half of the tIRA proceeds. It is an attempt at balancing, without making the model overly complex, the needs of the beneficiary and the wishes of the grantor. A real-world trustee would need to keep making these decisions continually, instead of setting it up once as in the model. That is what they are paid for, to balance all of these things while operating under the standards of trusteeship.
You’re misunderstanding my position. I believe in trusting the beneficiary and not mandating control from beyond the grave.

As such, if you have a spendthrift beneficiary in need of such safeguards, your model should not assume they’ll do anything other than spend the distributions. Which gets to why it’s not easy to make these models in the first place.

If on the other hand, the beneficiary is competent, you’re usually better off leaving the trad ira directly or coming up with a different plan.
With beneficiaries, it is not just a matter of trusting them. They may have the best character of anyone but that does not mean they have the necessary experience, knowledge, or skill, let alone the time and interest.

Further, does a beneficiary who ends up with an ex-spouse automatically qualify as someone who is untrustworthy? Of course not, so you are leaving assets in trust to protect the assets from the beneficiary's soon to be ex-spouse.

I am not sure you are reading all of these posts, so I will urge you again to go read Clark v. Rameker for just one of the many reasons why you want to leave a tIRA in trust and not outright.

It does not matter to the models whether the accumulation trust keeps all funds that will be reinvested and only distributes funds that will be spent by the beneficiary or whether the beneficiary reinvests some of those funds, as long as it is consistent. An accumulation trust is not a permanent barrier between a beneficiary and her money, it is a temporary barrier that will come down over time, at hopefully the right time and the beneficiary will end up with the full value of their legacy.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

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restingonmylaurels wrote: Thu Apr 22, 2021 2:02 pm
Lee_WSP wrote: Thu Apr 22, 2021 9:11 am
restingonmylaurels wrote: Thu Apr 22, 2021 6:57 am
Lee_WSP wrote: Tue Apr 20, 2021 11:58 am I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
If this is your belief, then no trust would ever make sense, as a trust by definition retains funds that could be in the hands of the beneficiary. An accumulation trust cannot just keep accumulating for the entire life of the beneficiary but needs to wisely share the benefits with the beneficiary.

It is not a case of half-trusting by distributing half of the tIRA proceeds. It is an attempt at balancing, without making the model overly complex, the needs of the beneficiary and the wishes of the grantor. A real-world trustee would need to keep making these decisions continually, instead of setting it up once as in the model. That is what they are paid for, to balance all of these things while operating under the standards of trusteeship.
You’re misunderstanding my position. I believe in trusting the beneficiary and not mandating control from beyond the grave.

As such, if you have a spendthrift beneficiary in need of such safeguards, your model should not assume they’ll do anything other than spend the distributions. Which gets to why it’s not easy to make these models in the first place.

If on the other hand, the beneficiary is competent, you’re usually better off leaving the trad ira directly or coming up with a different plan.
With beneficiaries, it is not just a matter of trusting them. They may have the best character of anyone but that does not mean they have the necessary experience, knowledge, or skill, let alone the time and interest.

Further, does a beneficiary who ends up with an ex-spouse automatically qualify as someone who is untrustworthy? Of course not, so you are leaving assets in trust to protect the assets from the beneficiary's soon to be ex-spouse.

I am not sure you are reading all of these posts, so I will urge you again to go read Clark v. Rameker for just one of the many reasons why you want to leave a tIRA in trust and not outright.

It does not matter to the models whether the accumulation trust keeps all funds that will be reinvested and only distributes funds that will be spent by the beneficiary or whether the beneficiary reinvests some of those funds, as long as it is consistent. An accumulation trust is not a permanent barrier between a beneficiary and her money, it is a temporary barrier that will come down over time, at hopefully the right time and the beneficiary will end up with the full value of their legacy.
You again misunderstand me. Those are all valid reasons for a discretionary trust or a trust with beneficiary as trustee (divorce). I may disagree as to the degree you should worry about them, but that is a different topic.

What does not make sense is trying to model your beneficiary saving half or any of the distributions. Once the distributions are made, they are no longer part of the trust and should no longer be accounted for in any model. It is now the beneficiary's money to do with as they wish.

Your last sentence is the standard thinking of trusts planning for the past 100 years or so. Hence the common 25, 30, 35 distribution schedule. But there are better ways to do it, IMO. Also, it should read "need not be a permanent barrier" because in some cases, it is a permanent barrier.

All that notwithstanding, the point I'm trying to make about TIRA's is that leaving them in an accumulation trust is very tax inefficient. Whether other concerns outweigh that concern is up to the grantor.

Finally, it is my opinion that the SECURE act more or less makes Clark moot since the funds need to be distributed in 10 years anyway unless you left it to an EDB. Besides, anyone who is bankrupt is by definition probably a spendthrift.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

Lee_WSP wrote: Thu Apr 22, 2021 2:23 pm 1. Your last sentence is the standard thinking of trusts planning for the past 100 years or so. Hence the common 25, 30, 35 distribution schedule. But there are better ways to do it, IMO. Also, it should read "need not be a permanent barrier" because in some cases, it is a permanent barrier.

2. All that notwithstanding, the point I'm trying to make about TIRA's is that leaving them in an accumulation trust is very tax inefficient. Whether other concerns outweigh that concern is up to the grantor.

3. Finally, it is my opinion that the SECURE act more or less makes Clark moot since the funds need to be distributed in 10 years anyway unless you left it to an EDB. Besides, anyone who is bankrupt is by definition probably a spendthrift.
You continue to look at these things in small pieces, instead of holistically. Just like it is not good investing, it is also not good succession planning.

1. Unless it is a dynasty trust, then the trustee's responsibility is to benefit only the beneficiary. The trust will either have a certain term or the beneficiary's life. In either case, the trustee's responsibility will be to provide the benefits to the beneficiary, so no, it should never be a permanent barrier, that would defeat the intent of the grantor and the desires of the beneficiary. Please show us your better way, one that considers all the legal risks that the average beneficiary is undertaking.

2. While the initial distribution of a tIRA to an accumulation trust is taxed at a higher rate, that gap may be smaller than you think with any beneficiary who is making a decent salary. And the tIRA directed to an accumulation trust will surpass the conduit trust treatment you suggest over time, as I have already demonstrated previously.

3. So leaving inherited assets exposed to creditors through bankruptcy like in Clark, future ex-spouses, or other creditors over a 10-year period of years, is not exposing the beneficiary to unnecessary legal risks? The beneficiary's attorney should advise them on a way out of that risk, which is what the trust provides. It is easily set up, relatively inexpensive, well established in law and in taxation, and provides legal risk reduction.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

It’s your estate plan. You aren’t paying me. Feel free to do and think what you want.

You seem to think I’m not about trusts. Contrarily I’m all for trusts. I am thinking of the TIRA issue holistically because I’ve run the scenarios, read through the commentary and studied the best practices. Leaving it in an accumulation trust is tax inefficient. Converting it to Roth first is usually going to result in a more efficient transfer. It has the added “benefit” of reducing your estate.

I don’t know why you keep thinking I’m saying trusts are bad or undesirable.

The reason the secure act more or less makes the case moot is because the vast majority of IRAs will now be drawn down within ten years anyway so the idea of the inherited IRA providing security is no longer a thing. Once a distribution is made it’s free game in most or all states. (I can’t even recall anyone ever telling me that leaving your IRA to a beneficiary is going to protect them in bankruptcy in the first place. It isn’t even necessarily protected for yourself depending on your state. )

But what do I know. I’m just some random poster on the internet.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by afan »

restingonmylaurels wrote: Thu Apr 22, 2021 6:57 am
Lee_WSP wrote: Tue Apr 20, 2021 11:58 am I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
No reason a beneficiary who "needs" an accumulation trust to keep money out of their estate and protected from creditors would spend ANY of the distributions they might receive. Such a beneficiary might prefer an accumulation trust with NO distributions.

If this is your belief, then no trust would ever make sense, as a trust by definition retains funds that could be in the hands of the beneficiary. An accumulation trust cannot just keep accumulating for the entire life of the beneficiary...
Of course it can. For many beneficiaries, this would be the best practice. The money would be there if the beneficiary needed it but otherwise pass to the next generation without estate tax and remain protected from creditors.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

afan wrote: Thu Apr 22, 2021 7:41 pm
restingonmylaurels wrote: Thu Apr 22, 2021 6:57 am
Lee_WSP wrote: Tue Apr 20, 2021 11:58 am I simply disagree with the notion of half trusting a beneficiary. In other words, I personally don't see a beneficiary who needs an accumulation trust turning around an investing half the distributed earnings. It's my opinion only; and each beneficiary is an individual and individuals can change or not comport with expectations.
No reason a beneficiary who "needs" an accumulation trust to keep money out of their estate and protected from creditors would spend ANY of the distributions they might receive. Such a beneficiary might prefer an accumulation trust with NO distributions.

If this is your belief, then no trust would ever make sense, as a trust by definition retains funds that could be in the hands of the beneficiary. An accumulation trust cannot just keep accumulating for the entire life of the beneficiary...
Of course it can. For many beneficiaries, this would be the best practice. The money would be there if the beneficiary needed it but otherwise pass to the next generation without estate tax and remain protected from creditors.
Not sure which point you are referring to but if my comment on accumulation trusts, you are saying two different things. First, it could bypass its beneficiary entirely without distributions and second, the beneficiary could take distributions as needed. Bypassing a beneficiary entirely makes that beneficiary essentially a trustee, not a beneficiary, as they receive no benefit. If the beneficiary is able to received discretionary distributions, then that is the definition of an accumulation trust. Whether an accumulation trust is intended to be defunded during the lifetime of its beneficiary or to pass to the heirs of that beneficiary is a choice the grantor can make. It would seem to be a rather odd choice for a beneficiary to become eligible at say age 25, live to age 105 and never receive a single benefit from the trust in 80 years. As a beneficiary, you would have to be a little put out, yes? Would not see this as best practice except for the wealthiest of beneficiaries who can afford to see the treasure ship sailing past without ever climbing onboard.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

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restingonmylaurels wrote: Sat Apr 24, 2021 2:56 am
afan wrote: Thu Apr 22, 2021 7:41 pm Of course it can. For many beneficiaries, this would be the best practice. The money would be there if the beneficiary needed it but otherwise pass to the next generation without estate tax and remain protected from creditors.
If the beneficiary is able to received discretionary distributions, then that is the definition of an accumulation trust. Whether an accumulation trust is intended to be defunded during the lifetime of its beneficiary or to pass to the heirs of that beneficiary is a choice the grantor can make. It would seem to be a rather odd choice for a beneficiary to become eligible at say age 25, live to age 105 and never receive a single benefit from the trust in 80 years. As a beneficiary, you would have to be a little put out, yes? Would not see this as best practice except for the wealthiest of beneficiaries who can afford to see the treasure ship sailing past without ever climbing onboard.
Why do you think that the Grantor has to make this choice? If they provide control over the trust to their primary beneficiary(s), than the primary beneficiary(s) can make the choice. This is what a lot of Grantors desire. The primary beneficiary can receive HEMS distributions as needed, without exposing the remaining assets to a divorcing spouse or creditors in a lawsuit. They can also keep a substantial amount of the assets out of their estates. In some states, the assets realize significant protections even if the primary beneficiary is serving as sole trustee.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

FIREchief wrote: Sat Apr 24, 2021 2:30 pm
restingonmylaurels wrote: Sat Apr 24, 2021 2:56 am
afan wrote: Thu Apr 22, 2021 7:41 pm Of course it can. For many beneficiaries, this would be the best practice. The money would be there if the beneficiary needed it but otherwise pass to the next generation without estate tax and remain protected from creditors.
If the beneficiary is able to received discretionary distributions, then that is the definition of an accumulation trust. Whether an accumulation trust is intended to be defunded during the lifetime of its beneficiary or to pass to the heirs of that beneficiary is a choice the grantor can make. It would seem to be a rather odd choice for a beneficiary to become eligible at say age 25, live to age 105 and never receive a single benefit from the trust in 80 years. As a beneficiary, you would have to be a little put out, yes? Would not see this as best practice except for the wealthiest of beneficiaries who can afford to see the treasure ship sailing past without ever climbing onboard.
Why do you think that the Grantor has to make this choice? If they provide control over the trust to their primary beneficiary(s), than the primary beneficiary(s) can make the choice. This is what a lot of Grantors desire. The primary beneficiary can receive HEMS distributions as needed, without exposing the remaining assets to a divorcing spouse or creditors in a lawsuit. They can also keep a substantial amount of the assets out of their estates. In some states, the assets realize significant protections even if the primary beneficiary is serving as sole trustee.
The grantor sets up the trust, with its term and supporting provisions. By defining whether the trust lasts only for the lifetime of the initial beneficiary or extends beyond that lifetime is something that the grantor would decide at trust drafting. The trust could also end when it is defunded, an indeterminate period. The grantor also decides the power that the beneficiary has, including their ability to select or be the trustee.

I am curious as to your source for this: "than the primary beneficiary(s) can make the choice. This is what a lot of Grantors desire."'
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

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restingonmylaurels wrote: Sun Apr 25, 2021 2:21 am I am curious as to your source for this: "than the primary beneficiary(s) can make the choice. This is what a lot of Grantors desire."'
I'll refer you to the many informative posts by bsteiner here on the forum, where he consistently recommends giving the primary beneficiary effective control over the trust. I suspect you're trapped in that false paradigm where trusts only exist to limit distributions to the primary beneficiaries (i.e. the whole "controlling from beyond the grave" rhetoric).
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by FIREchief »

restingonmylaurels wrote: Sun Apr 25, 2021 2:21 am By defining whether the trust lasts only for the lifetime of the initial beneficiary or extends beyond that lifetime is something that the grantor would decide at trust drafting.
Are you suggesting that all trusts define an "end point" for the trust?
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by plannerman »

I have been closely following all the discussions regarding the impact of the SECURE act on IRA distributions to other than a qualified designated beneficiary.

I have a beneficiary who, other than being relatively young, meets all of Bruce’s other criteria for a Charitable Remainder Trust. The beneficiary will be approximately 60 years old, single, in a low tax bracket, is likely to need all distributions, has some other money available for one-off needs, is unlikely to have a taxable estate, and is at low risk of creditors and spouses.

I’ve run some numbers for an Accumulation trust, a CRUT and a CRAT.
For the Accumulation trust, I assumed:
$1million TIRA
5% investment return
.55% trustee fee
Trust tax rate on initial distribution of the IRA to the trust of 42% (37% fed + 5% state) for distributing the IRA to the trust over
10-years or 45% which includes the 3% NIT for a lump sum distribution into the trust.
$50k distribution to beneficiary

For the CRTs:
Same as above except 1% for the trustee fee.

What’s important to me is that I want the distributions to last for the beneficiary’s life expectancy.

For the Accumulation trust with the above assumptions, the trust will be depleted, more or less depending on the sequence of returns, in about 18 years. Lowering the beneficiary’s distribution to $40k increases the length of time to about 26 years. Still not enough for me.

For the CRAT the $50k distribution is likely to last for more than 40 years. And a safe distribution might be as high as $70k, if it passes the IRS 10% charitable remainder test.

So clearly in this situation, and if I didn’t make a mistake, the CRAT is a much better choice.

I also look a CRUT with a 5% distribution. But with my assumptions, the trust corpus declines over time along with the distributions to the beneficiary. So that was a nonstarter for me.

I welcome and comment or questions. I look ing for confimation that my analysis makes sense.

plannerman
Last edited by plannerman on Sun Apr 25, 2021 3:56 pm, edited 1 time in total.
afan
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by afan »

restingonmylaurels wrote: Sat Apr 24, 2021 2:56 am ... you are saying two different things. First, it could bypass its beneficiary entirely without distributions and second, the beneficiary could take distributions as needed.
Exactly. The beneficiary and trustee, who may or may not be the same person, decide on the timing and size of distributions, if any.

Bypassing a beneficiary entirely makes that beneficiary essentially a trustee, not a beneficiary, as they receive no benefit.
Not exactly. The beneficiary recieves the benefit of having a side fund that is available if needed. This permits them to, for example, be more aggressive in their personal investing. Or more aggressive in the trusts, which would bypass estate taxes. Assuming the beneficiary's heirs would be the remainderpeople of the trust, the beneficiary also benefits from knowing they are directing as a legacy to their kids any amounts they don't consume.
It would seem to be a rather odd choice for a beneficiary to become eligible at say age 25, live to age 105 and never receive a single benefit from the trust in 80 years. As a beneficiary, you would have to be a little put out, yes?
Well, no.
It would depend on the beneficiary's goals and circumstances. I have friends who make good livings and may end up with taxable estates. They also are beneficiaries of trusts from which they have never taken a distribution. If things go as planned, they never will. The trusts are a big benefit, although they do not take money from them.

Would not see this as best practice except for the wealthiest of beneficiaries who can afford to see the treasure ship sailing past without ever climbing onboard.
It is not a treasure ship. It is a store of assets. If the assets do what they are for, provide for the future, provide some security, create a legacy for heirs, then they have done their jobs.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Lee_WSP
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

plannerman wrote: Sun Apr 25, 2021 2:15 pm
What’s important to me is that I want the distributions to last for the beneficiary’s life expectancy.

For the Accumulation trust with the above assumptions, the trust will be depleted, more or less depending on the sequence of returns, in about 18 years. Lowering the beneficiary’s distribution to $40k increases the length of time to about 26 years. Still not enough for me.
Only minor quibble with your model is that you can structure it to avoid state taxes, but that doesn't change the conclusion.

The accumulation trust is for accumulation of wealth/assets. Not an annuity or annuity like stream of payments. So, it's not designed for what you have in mind.

Since the account is tax deferred, the charitable remainder trust is going to be a great option as it allows for a much lower tax hit.

Between the annuity and crut, it's going to depend on the assumptions you put in. On the one hand, your beneficiary is relatively old, on the other the CRUT provides some inflation protection.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by FIREchief »

Lee_WSP wrote: Sun Apr 25, 2021 2:37 pm The accumulation trust is for accumulation of wealth/assets.
I wouldn't describe it like this. I would suggest that an accumulation trust is to separate the schedule of the required distributions from a qualified retirement account from the schedule for distributions to the beneficiary. Certainly, if they are not immediately distributed out of the trust, than there is an accumulation of assets within the trust. However, that's more a by-product than the main purposes which would include keeping them out of the beneficiary's estate and providing asset protections.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

FIREchief wrote: Sun Apr 25, 2021 2:56 pm
Lee_WSP wrote: Sun Apr 25, 2021 2:37 pm The accumulation trust is for accumulation of wealth/assets.
I wouldn't describe it like this. I would suggest that an accumulation trust is to separate the schedule of the required distributions from a qualified retirement account from the schedule for distributions to the beneficiary. Certainly, if they are not immediately distributed out of the trust, than there is an accumulation of assets within the trust. However, that's more a by-product than the main purposes which would include keeping them out of the beneficiary's estate and providing asset protections.
If the bolded section is not included in the very definition of wealth accumulation, I'm not sure we're on the same page.

* I could be using the terms incorrectly or using the less used meaning myself, so I'm open to definition clarification
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by FIREchief »

Lee_WSP wrote: Sun Apr 25, 2021 2:59 pm
FIREchief wrote: Sun Apr 25, 2021 2:56 pm
Lee_WSP wrote: Sun Apr 25, 2021 2:37 pm The accumulation trust is for accumulation of wealth/assets.
I wouldn't describe it like this. I would suggest that an accumulation trust is to separate the schedule of the required distributions from a qualified retirement account from the schedule for distributions to the beneficiary. Certainly, if they are not immediately distributed out of the trust, than there is an accumulation of assets within the trust. However, that's more a by-product than the main purposes which would include keeping them out of the beneficiary's estate and providing asset protections.
If the bolded section is not included in the very definition of wealth accumulation, I'm not sure we're on the same page.

* I could be using the terms incorrectly or using the less used meaning myself, so I'm open to definition clarification
I'll stick with my comments. I'm pretty sure you know what I am saying. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

FIREchief wrote: Sun Apr 25, 2021 3:16 pm
Lee_WSP wrote: Sun Apr 25, 2021 2:59 pm
FIREchief wrote: Sun Apr 25, 2021 2:56 pm
Lee_WSP wrote: Sun Apr 25, 2021 2:37 pm The accumulation trust is for accumulation of wealth/assets.
I wouldn't describe it like this. I would suggest that an accumulation trust is to separate the schedule of the required distributions from a qualified retirement account from the schedule for distributions to the beneficiary. Certainly, if they are not immediately distributed out of the trust, than there is an accumulation of assets within the trust. However, that's more a by-product than the main purposes which would include keeping them out of the beneficiary's estate and providing asset protections.
If the bolded section is not included in the very definition of wealth accumulation, I'm not sure we're on the same page.

* I could be using the terms incorrectly or using the less used meaning myself, so I'm open to definition clarification
I'll stick with my comments. I'm pretty sure you know what I am saying. 8-)
Since the term is not a precise term and merely refers to the mechanism of how distributions from the IRA will be handled (compared to the conduit trust), I think it's safe to say we're on the same page as to the actual mechanics of specific scenarios and leave it at that. :beer
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

plannerman wrote: Sun Apr 25, 2021 2:15 pm I have been closely following all the discussions regarding the impact of the SECURE act on IRA distributions to other than a qualified designated beneficiary.

I have a beneficiary who, other than being relatively young, meets all of Bruce’s other criteria for a Charitable Remainder Trust. The beneficiary will be approximately 60 years old, single, in a low tax bracket, is likely to need all distributions, has some other money available for one-off needs, is unlikely to have a taxable estate, and is at low risk of creditors and spouses.

I’ve run some numbers for an Accumulation trust, a CRUT and a CRAT.
For the Accumulation trust, I assumed:
$1million TIRA
5% investment return
.55% trustee fee
Trust tax rate on initial distribution of the IRA to the trust of 42% (37% fed + 5% state) for distributing the IRA to the trust over
10-years or 45% which includes the 3% NIT for a lump sum distribution into the trust.
$50k distribution to beneficiary

For the CRTs:
Same as above except 1% for the trustee fee.

What’s important to me is that I want the distributions to last for the beneficiary’s life expectancy.

For the Accumulation trust with the above assumptions, the trust will be depleted, more or less depending on the sequence of returns, in about 18 years. Lowering the beneficiary’s distribution to $40k increases the length of time to about 26 years. Still not enough for me.

For the CRAT the $50k distribution is likely to last for more than 40 years. And a safe distribution might be as high as $70k, if it passes the IRS 10% charitable remainder test.

So clearly in this situation, and if I didn’t make a mistake, the CRAT is a much better choice.

I also look a CRUT with a 5% distribution. But with my assumptions, the trust corpus declines over time along with the distributions to the beneficiary. So that was a nonstarter for me.

I welcome and comment or questions. I look ing for confimation that my analysis makes sense.

plannerman
A few quick thoughts on reading your plan.

1. There is not NIIT on the distributions of the tIRA into the trust.
2. The trustee fee for the CRTs should not be higher than for the accumulation trust.
3. I am not sure when you would ever had to apply NIIT, as your trust is distributing more than your annual earnings and NIIT is only on any undistributed net investment income.
4. How are your investment returns, and then distributions, happening; i.e., is it all capital gains which are then sold to distribute or is some of it bond interest?
5. You have to look at what the beneficiary receives on an after-tax basis. Remember with the CRTs distributing tIRA proceeds, it is all going to be ordinary income for a long time, while the accumulation trust may be distributing capital gains/QDI taxed income. Then there are the state tax implications.
6. The marginal tax rate of the beneficiary matters, as you may be comparing their marginal rate versus that of the trusts for ordinary income and then capital gains/QDI rates versus ordinary income. Do these $50k annual distributions put them into the 22% federal bracket (+ state taxes)?
7. What made your CRUT corpus decline over time, the trustee fee? With 5% earnings and 5% payout, it should not decline absent other expenses?
8. Since you are essentially distributing the same amounts in the CRAT ($50) and the CRUT (5% of $1m), I do not see that these will differ much.
9. The results I modeled showed the CRUT ending up with more total assets than the accumulation trust but as a significant percent is targeted to charity, the beneficiary receives less with a CRUT, meaning the key decision is around the charitable intent.
10. Given the advanced age of the beneficiary when the trust begins, their need for the money, their low tax bracket, and low risk from creditors, perhaps you should also model a conduit trust, meaning they would have all of the assets by age 70.
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restingonmylaurels
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

afan wrote: Sun Apr 25, 2021 2:26 pm
restingonmylaurels wrote: Sat Apr 24, 2021 2:56 amIt would seem to be a rather odd choice for a beneficiary to become eligible at say age 25, live to age 105 and never receive a single benefit from the trust in 80 years. As a beneficiary, you would have to be a little put out, yes?
Well, no.
It would depend on the beneficiary's goals and circumstances. I have friends who make good livings and may end up with taxable estates. They also are beneficiaries of trusts from which they have never taken a distribution. If things go as planned, they never will. The trusts are a big benefit, although they do not take money from them.
restingonmylaurels wrote: Sat Apr 24, 2021 2:56 am Would not see this as best practice except for the wealthiest of beneficiaries who can afford to see the treasure ship sailing past without ever climbing onboard.
It is not a treasure ship. It is a store of assets. If the assets do what they are for, provide for the future, provide some security, create a legacy for heirs, then they have done their jobs.
There really is nothing substantive here to comment on. You are looking at this from the perspective of people you know, who are clearly among the wealthiest segment of society who can afford to let an accumulation trust sit for their entire lives without taking a distribution. Lucky for you. But I doubt that is the typical life scenario, and I am trying to describe what the typical grantor might plan for, not for some ultra wealthy trust funders.

Unfortunately, social policy in the U.S. has moved far away from the original American concept of each person earns their own in life, starting from the ban on titles of nobility in the Constitution. That, however, is a different discussion in a different forum. My interest is the typical case for the typical BHer.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by afan »

The people I was discussing are not ultra wealthy. The UHNW segment of the population is so far above estate tax exclusion amounts that this barely shows up in their estate planning. For them, the exclusions are such a small share of their assets that almost all of their planning revolves around other strategies.

I am talking about regular people with a pair of good professional jobs. They are conservative in their spending, so they accumulate money. That is why they don't spend from the trusts, they don't need the money to live the lives they want.

They also illustrate an ideal case for accumulation trusts. As grantors, they can provide for their heirs in a way that makes the money available if they need or want it but otherwise protects it.

I don't know the demographics of bogleheads, so I cannot comment on what is typical.

A major conclusion of the thread, a point I have been making, is that optimal planning depends on the circumstances of the beneficiaries and the size of the trust. Some first generation beneficiaries may need every penny of the trust assets just to make ends meet. Others might go their entire lives without the need to touch the trust at all. There will be people between these extremes.

It is not reasonable to pick a single set of circumstances, assume they apply to everyone and thus that there is a single optimal approach no matter the situation. One has to take these considerations into account when planning.

Saving 50% of distributions: As discussed here and in the original thread, sometimes there may be distributions made to optimize income tax treatment, rather than because the beneficiary needs to spend the entire amount. A beneficiary who received a distribution for this reason might well save some or all of it.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by plannerman »

restingonmylaurels wrote: Mon Apr 26, 2021 1:29 am
plannerman wrote: Sun Apr 25, 2021 2:15 pm I have been closely following all the discussions regarding the impact of the SECURE act on IRA distributions to other than a qualified designated beneficiary.

I have a beneficiary who, other than being relatively young, meets all of Bruce’s other criteria for a Charitable Remainder Trust. The beneficiary will be approximately 60 years old, single, in a low tax bracket, is likely to need all distributions, has some other money available for one-off needs, is unlikely to have a taxable estate, and is at low risk of creditors and spouses.

I’ve run some numbers for an Accumulation trust, a CRUT and a CRAT.
For the Accumulation trust, I assumed:
$1million TIRA
5% investment return
.55% trustee fee
Trust tax rate on initial distribution of the IRA to the trust of 42% (37% fed + 5% state) for distributing the IRA to the trust over
10-years or 45% which includes the 3% NIT for a lump sum distribution into the trust.
$50k distribution to beneficiary

For the CRTs:
Same as above except 1% for the trustee fee.

What’s important to me is that I want the distributions to last for the beneficiary’s life expectancy.

For the Accumulation trust with the above assumptions, the trust will be depleted, more or less depending on the sequence of returns, in about 18 years. Lowering the beneficiary’s distribution to $40k increases the length of time to about 26 years. Still not enough for me.

For the CRAT the $50k distribution is likely to last for more than 40 years. And a safe distribution might be as high as $70k, if it passes the IRS 10% charitable remainder test.

So clearly in this situation, and if I didn’t make a mistake, the CRAT is a much better choice.

I also look a CRUT with a 5% distribution. But with my assumptions, the trust corpus declines over time along with the distributions to the beneficiary. So that was a nonstarter for me.

I welcome and comment or questions. I look ing for confimation that my analysis makes sense.

plannerman
A few quick thoughts on reading your plan.

1. There is not NIIT on the distributions of the tIRA into the trust.
2. The trustee fee for the CRTs should not be higher than for the accumulation trust.
3. I am not sure when you would ever had to apply NIIT, as your trust is distributing more than your annual earnings and NIIT is only on any undistributed net investment income.
4. How are your investment returns, and then distributions, happening; i.e., is it all capital gains which are then sold to distribute or is some of it bond interest?
5. You have to look at what the beneficiary receives on an after-tax basis. Remember with the CRTs distributing tIRA proceeds, it is all going to be ordinary income for a long time, while the accumulation trust may be distributing capital gains/QDI taxed income. Then there are the state tax implications.
6. The marginal tax rate of the beneficiary matters, as you may be comparing their marginal rate versus that of the trusts for ordinary income and then capital gains/QDI rates versus ordinary income. Do these $50k annual distributions put them into the 22% federal bracket (+ state taxes)?
7. What made your CRUT corpus decline over time, the trustee fee? With 5% earnings and 5% payout, it should not decline absent other expenses?
8. Since you are essentially distributing the same amounts in the CRAT ($50) and the CRUT (5% of $1m), I do not see that these will differ much.
9. The results I modeled showed the CRUT ending up with more total assets than the accumulation trust but as a significant percent is targeted to charity, the beneficiary receives less with a CRUT, meaning the key decision is around the charitable intent.
Thanks for taking the time to respond I appreciate it.

1. There is not NIIT on the distributions of the tIRA into the trust.

While RMDs are not subject to NIT, I don't think this is the case for distributions from inherited IRA's. Here's a quote from an article by Ed Slott:

"The 3.8% surtax will hit trusts especially hard. It kicks in when trust income reaches the top brackets, which in 2013 will be about $12,000 of income. If your client has named a trust as the IRA beneficiary, inherited IRA funds held in the trust will likely be subject to a 43.4% tax at low income levels."

Maybe one of our tax experts will chime in here.

2. The trustee fee for the CRTs should not be higher than for the accumulation trust.

I hope you are right. But CRT taxes are more complicated and that usually means more expensive. I doubt most professional tax preparers have ever done a split interest trust tax return.

3. I am not sure when you would ever had to apply NIIT, as your trust is distributing more than your annual earnings and NIIT is only on any undistributed net investment income.

I'm not concerned about NIT on distributions from the trust. I'm concerned about NIT on distributions from the IRA to the trust.

4. How are your investment returns, and then distributions, happening; i.e., is it all capital gains which are then sold to distribute or is some of it bond interest?

Assuming you are talking about the Accumulation trust distributions here, I would expect it to be a mix of ordinary income and capital gains. My beneficiary is in a low tax bracket.

5. You have to look at what the beneficiary receives on an after-tax basis. Remember with the CRTs distributing tIRA proceeds, it is all going to be ordinary income for a long time, while the accumulation trust may be distributing capital gains/QDI taxed income. Then there are the state tax implications.

I understand that.

6. The marginal tax rate of the beneficiary matters, as you may be comparing their marginal rate versus that of the trusts for ordinary income and then capital gains/QDI rates versus ordinary income. Do these $50k annual distributions put them into the 22% federal bracket (+ state taxes)?

Not under current tax law.

7. What made your CRUT corpus decline over time, the trustee fee? With 5% earnings and 5% payout, it should not decline absent other expenses?

Yes, the trustee fee.

8. Since you are essentially distributing the same amounts in the CRAT ($50) and the CRUT (5% of $1m), I do not see that these will differ much.

I agree. But with my assumptions, the 5% of the CRUT declines over time while the CRAT distribution remains the same. Idealiy, I would want the distribution to increase over time but I can't come up with a reasonable set of assumptions that makes that likely.

9. The results I modeled showed the CRUT ending up with more total assets than the accumulation trust but as a significant percent is targeted to charity, the beneficiary receives less with a CRUT, meaning the key decision is around the charitable intent.

That may very well be the case, but my criteria is lifetime income not maximizing the distribution to the beneficiary and not charitable intent.

10. Given the advanced age of the beneficiary when the trust begins, their need for the money, their low tax bracket, and low risk from creditors, perhaps you should also model a conduit trust, meaning they would have all of the assets by age 70.

Again, my intent is lifetime income. I don't want my beneficiary living under a bridge because he ran out of money when I dead and gone.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by Lee_WSP »

The only thing the numbers absolutely tell you is that one trust provides for a steady stream of income and the other allows for it to accumulate at the discretion of the trustee for whatever purpose the grantor and drafter design.

As far as CRAT vs CRUT, the CRAT is a definite benefit whereas the CRUT does depend on market returns to an extent. So the shorter the expected lifespan, the more one would be prudent to lean towards a CRAT.
Last edited by Lee_WSP on Mon Apr 26, 2021 11:25 am, edited 1 time in total.
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by restingonmylaurels »

plannerman wrote: Mon Apr 26, 2021 8:40 am
restingonmylaurels wrote: Mon Apr 26, 2021 1:29 am
plannerman wrote: Sun Apr 25, 2021 2:15 pm I have been closely following all the discussions regarding the impact of the SECURE act on IRA distributions to other than a qualified designated beneficiary.

I have a beneficiary who, other than being relatively young, meets all of Bruce’s other criteria for a Charitable Remainder Trust. The beneficiary will be approximately 60 years old, single, in a low tax bracket, is likely to need all distributions, has some other money available for one-off needs, is unlikely to have a taxable estate, and is at low risk of creditors and spouses.

I’ve run some numbers for an Accumulation trust, a CRUT and a CRAT.
For the Accumulation trust, I assumed:
$1million TIRA
5% investment return
.55% trustee fee
Trust tax rate on initial distribution of the IRA to the trust of 42% (37% fed + 5% state) for distributing the IRA to the trust over
10-years or 45% which includes the 3% NIT for a lump sum distribution into the trust.
$50k distribution to beneficiary

For the CRTs:
Same as above except 1% for the trustee fee.

What’s important to me is that I want the distributions to last for the beneficiary’s life expectancy.

For the Accumulation trust with the above assumptions, the trust will be depleted, more or less depending on the sequence of returns, in about 18 years. Lowering the beneficiary’s distribution to $40k increases the length of time to about 26 years. Still not enough for me.

For the CRAT the $50k distribution is likely to last for more than 40 years. And a safe distribution might be as high as $70k, if it passes the IRS 10% charitable remainder test.

So clearly in this situation, and if I didn’t make a mistake, the CRAT is a much better choice.

I also look a CRUT with a 5% distribution. But with my assumptions, the trust corpus declines over time along with the distributions to the beneficiary. So that was a nonstarter for me.

I welcome and comment or questions. I look ing for confimation that my analysis makes sense.

plannerman
A few quick thoughts on reading your plan.

1. There is not NIIT on the distributions of the tIRA into the trust.
2. The trustee fee for the CRTs should not be higher than for the accumulation trust.
3. I am not sure when you would ever had to apply NIIT, as your trust is distributing more than your annual earnings and NIIT is only on any undistributed net investment income.
4. How are your investment returns, and then distributions, happening; i.e., is it all capital gains which are then sold to distribute or is some of it bond interest?
5. You have to look at what the beneficiary receives on an after-tax basis. Remember with the CRTs distributing tIRA proceeds, it is all going to be ordinary income for a long time, while the accumulation trust may be distributing capital gains/QDI taxed income. Then there are the state tax implications.
6. The marginal tax rate of the beneficiary matters, as you may be comparing their marginal rate versus that of the trusts for ordinary income and then capital gains/QDI rates versus ordinary income. Do these $50k annual distributions put them into the 22% federal bracket (+ state taxes)?
7. What made your CRUT corpus decline over time, the trustee fee? With 5% earnings and 5% payout, it should not decline absent other expenses?
8. Since you are essentially distributing the same amounts in the CRAT ($50) and the CRUT (5% of $1m), I do not see that these will differ much.
9. The results I modeled showed the CRUT ending up with more total assets than the accumulation trust but as a significant percent is targeted to charity, the beneficiary receives less with a CRUT, meaning the key decision is around the charitable intent.
Thanks for taking the time to respond I appreciate it.

1. There is not NIIT on the distributions of the tIRA into the trust.

While RMDs are not subject to NIT, I don't think this is the case for distributions from inherited IRA's. Here's a quote from an article by Ed Slott:

"The 3.8% surtax will hit trusts especially hard. It kicks in when trust income reaches the top brackets, which in 2013 will be about $12,000 of income. If your client has named a trust as the IRA beneficiary, inherited IRA funds held in the trust will likely be subject to a 43.4% tax at low income levels."

Maybe one of our tax experts will chime in here.

2. The trustee fee for the CRTs should not be higher than for the accumulation trust.

I hope you are right. But CRT taxes are more complicated and that usually means more expensive. I doubt most professional tax preparers have ever done a split interest trust tax return.

3. I am not sure when you would ever had to apply NIIT, as your trust is distributing more than your annual earnings and NIIT is only on any undistributed net investment income.

I'm not concerned about NIT on distributions from the trust. I'm concerned about NIT on distributions from the IRA to the trust.

4. How are your investment returns, and then distributions, happening; i.e., is it all capital gains which are then sold to distribute or is some of it bond interest?

Assuming you are talking about the Accumulation trust distributions here, I would expect it to be a mix of ordinary income and capital gains. My beneficiary is in a low tax bracket.

5. You have to look at what the beneficiary receives on an after-tax basis. Remember with the CRTs distributing tIRA proceeds, it is all going to be ordinary income for a long time, while the accumulation trust may be distributing capital gains/QDI taxed income. Then there are the state tax implications.

I understand that.

6. The marginal tax rate of the beneficiary matters, as you may be comparing their marginal rate versus that of the trusts for ordinary income and then capital gains/QDI rates versus ordinary income. Do these $50k annual distributions put them into the 22% federal bracket (+ state taxes)?

Not under current tax law.

7. What made your CRUT corpus decline over time, the trustee fee? With 5% earnings and 5% payout, it should not decline absent other expenses?

Yes, the trustee fee.

8. Since you are essentially distributing the same amounts in the CRAT ($50) and the CRUT (5% of $1m), I do not see that these will differ much.

I agree. But with my assumptions, the 5% of the CRUT declines over time while the CRAT distribution remains the same. Idealiy, I would want the distribution to increase over time but I can't come up with a reasonable set of assumptions that makes that likely.

9. The results I modeled showed the CRUT ending up with more total assets than the accumulation trust but as a significant percent is targeted to charity, the beneficiary receives less with a CRUT, meaning the key decision is around the charitable intent.

That may very well be the case, but my criteria is lifetime income not maximizing the distribution to the beneficiary and not charitable intent.

10. Given the advanced age of the beneficiary when the trust begins, their need for the money, their low tax bracket, and low risk from creditors, perhaps you should also model a conduit trust, meaning they would have all of the assets by age 70.

Again, my intent is lifetime income. I don't want my beneficiary living under a bridge because he ran out of money when I dead and gone.
1. and 3. NIIT doesn't apply on distributions from the tIRA, whether as RMDs or distributions above the minimum. To be very clear, NIIT only applies to investment income earned by the trust and not distributed to the beneficiary and over the beginning threshhold of the highest marginal rate applicable to the trust (currently ($13.050).
2. If you are assuming VNTC, they can handle the more complicated trust tax returns for the same fee, I already had this conversation with them. Give them a call if you would like to verify.
4, 5, and 6. For a single person in 2021, the 22% bracket begins at taxable income of $40,526 (total income/AGI of $53,076 = 40,526 + 12,550). So your beneficiary has essentially no income at all? Are they someone who might qualify for a trust based on disability?
7. and 8. Outside of modeling, the CRUT may well outperform the CRAT, given that your growth rate may exceed 5% per year. So the depletion may come to the CRAT instead of the CRUT.
9. If you wish to maximize distributions to the beneficiary, I believe a discretionary trust would do that better, if you do not intend to pass the trust's on to another generation but instead will distribute it all to this generation. Again, the charitable donation at the end is significant.
10. Based on average lifetime expectancy, you are looking at a trust term of about 25 years. If you are worried about your beneficiary living under a bridge, then you really should give the discretion to the trustee to monitor the situation and adjust the distributions as needs warrant.

It would be easier to follow if you could post your model.
Last edited by restingonmylaurels on Mon Apr 26, 2021 4:29 pm, edited 1 time in total.
retiringwhen
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Re: Conclusions: tIRAs, trusts, and the SECURE Act

Post by retiringwhen »

NIIT only applies on investment income (Dividends and Capitals gains) earned by the taxpayer (human or trust) when total income as defined by the Modified Adjusted Gross Income (MAGI) is excess of a specific threshold. IRA Distributions only apply to the MAGI exclusion, but are themselves not subject to NIIT.

See below:
https://www.irs.gov/taxtopics/tc559 wrote: Individuals
In the case of an individual, the NIIT is 3.8 percent on the lesser of:

the net investment income, or the excess of modified adjusted gross income over the following threshold amounts:
- $250,000 for married filing jointly or qualifying widow(er)
- $125,000 for married filing separately
- $200,000 in all other cases

Estates & Trusts
In the case of an estate or trust, the NIIT is 3.8 percent on the lesser of:

(A) the undistributed net investment income, or
(B) the excess (if any) of:
- the adjusted gross income over the dollar amount at which the highest tax bracket begins for an estate or trust for the tax year. (For estates and trusts, the 2020 threshold is $12,950)
Here is the IRS form: https://www.irs.gov/pub/irs-pdf/f8960.pdf
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