neurosphere wrote: ↑
Fri Jul 31, 2020 11:41 am
bsteiner wrote: ↑
Fri Jul 31, 2020 11:09 am
If the nieces and nephews are young but at least age 27, they might be better off under the SECURE Act if you leave them the traditional IRA in a charitable remainder trust. See my article on this in the April 2020 issue of Trusts & Estates, which discusses when this might work well (and when it might not work well): https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf
It seems like none of the beneficiaries are the OPs children based on the ages and the way the post is worded, but yes something to verify.
Very nicely written article. I knew little to nothing about CRTs and now I feel I know...more. My million mile view lay summary of some pros/cons:
-- It can be hard to decide how best to set up the CRT and requires skilled experts. There is ongoing additional reporting. Thus, assets in a CRT and potential tax savings should be enough to justify the time and expense. Not sure what "enough" is. A million?
-- CRTs are inflexible, and do not provide the beneficiary the option making year to year decisions about how much income to take and pay taxes on, as one can do over 10 years with an inherited IRA.
-- One must be comfortable that most of the money in the CRT might go not go to the beneficiary or their heirs if the beneficiary dies, because upon death the remainder goes to charity "charitable remainder trust". Sounds like CRTs are best suited for a beneficiary who has no need for any extra assets after deaths, e.g. an otherwise wealthy beneficiary, or a special needs beneficiary who only needs the money while alive. On the other hand, a special needs beneficiary may need the flexibility of an IRA rather than the CRT.
-- CRTs are not good for younger (less than 27) beneficiaries, as you make clear.
-- CRTs might turn out to be quite inferior to an inherited IRA, if economic, mortality, and other assumptions turn out to be in accurate. They add additional elements of risk compared to an IRA.
-- Some money must eventually go to charity, which some might view as a feature, and others as a cost/fee.
It's easy to decide how to set up the CRT. The payout rate would be that rate at which the present value of the charity's remainder interest is 10%. Any law firm with a good trusts and estates group should be able to do it.
The trust files an annual return on Form 5227: https://www.irs.gov/pub/irs-pdf/f5227.pdf
. Any of the medium size accounting firms can do it. An accountant not familiar with it may need more time the first year, but after the first year should be able to do it.
At least until now, when CRTs were mainly to be able to sell appreciated assets without current capital gains tax, most of them were for much less than $1 million.
The cost of the remainder going to charity (the present value of the charity's remainder interest, which is 10% of the initial value of the trust) is generally offset or more than offset by the benefit of the deferral.
You can hedge against the risk of the beneficiary dying early and the beneficiary's family losing the remainder by buying life insurance on the beneficiary's life to cover the period until no one is dependent on the beneficiary.
You are correct that CRTs are inflexible. So there would have to be other assets available for the beneficiary for one-off needs.
If the beneficiary is disabled (essentially the same test as for Social Security), you don't need this. A discretionary trust for the benefit of a disabled beneficiary still gets the life expectancy stretch even under the SECURE Act.
LookinAround wrote: ↑
Fri Jul 31, 2020 12:08 pm
... I have no children. All of the children are grandnieces and grandnephews. There are four: ages 4 and 4 (twins), 6 and 8 so doubtful I'm alive when they're all 27.
I'll go off and read your CRT article (or does it apply if they all aren't 27 when I pass?).
Does a see-through trust offer any control of the money other than (based on reading i think i can) dictate the amount of RMD each year but, even then, it all must be withdrawn in 10 years which might still be too soon.
Another question: Of the money I leave them in from my taxable account, my current revocable trust says they get their money at age 25 (but plan to raise that to 30). But can that stipulation be made in the trust? Does the money go into a UTMA account till 18 then held by parents or my trustee till 30? Or would that money stay in my Vanguard trust account till then. Obviously uncertain how the distribution works.
From the ages, I suspected they were grandnieces and grandnephews.
From the ages, I would also suspect that your nieces and nephews are relatively young. So you might want to consider leaving your traditional IRAs to them in CRTs.
Under the SECURE Act, with a few exceptions, IRAs have to be fully distributed by the end of the tenth calendar year after death. There aren't any RMDs other than in the last year the entire balance of the IRA is an RMD. Make sure not to conflate required distributions from the IRA to the beneficiary (trusts in this case) and required distributions from the trust to the beneficiaries of the trust. Unless you provide otherwise (which our clients generally don't), the trustees have discretion to decide each year how much to distribute to the beneficiaries of the trust and how much to retain in the trust.
In that regard, we wouldn't mandate distribution at age 25 or 30. Rather, we would provide that upon reaching the specified age, the beneficiary gains effective control over his/her trust. In other words, the beneficiary may become a trustee, may remove and replace his/her co-trustee (provided the replacement isn't a close relative or subordinate employee), and the beneficiary may appoint (give) trust assets to anyone he/she wants (other than himself/herself or his/her estate or creditors).