A Charitable Trust Extends Stretch IRAs
Summary
- The SECURE Act means substantial changes to retirement and trust planning, especially if you are leaving retirement assets behind.
- A charitable trust can help you maximize your giving while also providing several benefits for you and your beneficiaries.
- If properly structured, a charitable remainder unitrust (CRUT) can provide financial and tax benefits beyond simply writing a check to your favorite charity.
The recent passage of the SECURE Act, specifically the change in the stretch IRA distribution, has impacts beyond retirement planning. If you’re passionate about charitable giving and you want to maximize the impact of your gifts, you may want to consider a charitable remainder unitrust (CRUT) to ensure you can stretch IRA distributions to children and other non-spouse beneficiaries beyond the 10-year period that is now required by the SECURE Act.
A CRUT is a special type of charitable trust that provides several benefits to your favorite charities and your loved ones. With a CRUT, your charity receives a tax-free benefit while your beneficiaries receive estate tax benefits and a lifetime income stream. If properly structured, a CRUT can provide financial and tax benefits beyond simply writing a check to your favorite charity.
Why Use a CRUT?
A charitable trust allows your retirement assets to continue growing tax-deferred, regaining a longer time period for your stretch IRA that was lost with the passage of the SECURE Act. Your beneficiaries can still receive their inheritance, while your favorite charities also receive income. It is perfect for those who want to minimize taxes for their beneficiaries and provide for charity down the line. Tax is paid only when the trust distributes income to the beneficiary (often a child or other non-charitable beneficiary).
When does the charity come into play? Generally, the charity receives the balance of the trust assets when the initial non-charitable beneficiary dies or at the end of a term (for example, 20 years from the account owner’s passing). The only requirement is that the trust is designed to leave 10 percent of the initial contribution to charity.
How does a CRUT work?
A CRUT is irrevocable, (meaning the grantor no longer has ownership of the assets in the trust) and as such, it can only be changed in limited circumstances once it’s set up. The grantor, you, makes a charitable gift (for example, your retirement account, or highly appreciated assets like stock or real estate) to the CRUT, resulting in a potential income tax deduction. In the case of retirement accounts, the grantor would name the CRUT as the beneficiary, resulting in the retirement account paying to the CRUT upon the grantor’s death.
When the CRUT sells the underlying assets of the IRA for example, and reinvests the proceeds, this is a tax-free transaction and no capital gains taxes are incurred. The proceeds are then used to pay the grantor and/or other beneficiaries an annual income stream as set by the terms of the trust. And at the end of the CRUT term (usually the death of the beneficiary but no more than 20 years), the CRUT terminates and distributes the remaining trust property to the chosen charities.
Like other trusts, managing the CRUT is complex and requires a trustee to manage, invest, and distribute trust funds, so a professional who is familiar with governing a CRUT should be chosen as a trustee.
Should I consider setting up a CRUT?
A CRUT may be appropriate if any of the following apply:
- You are charitably inclined, and you own highly appreciated assets or assets that may appreciate substantially in the future.
- Your net worth exceeds or will likely exceed the applicable estate tax exclusion amount at the state or federal level. This is as low as $1 million in some states.
- You have tax-deferred retirement assets (traditional IRAs and 401(k)s) that you hope will benefit your loved ones, especially if a Roth conversion is not an appropriate option for you.
You have saved and planned for your life and want to help extend these benefits for future generations. If you are passionate about giving to charities and causes, there are several ways you can get involved. Learn more about how you can get started and reach out to your advisor if you have questions or want to set up a CRUT as part of your comprehensive estate plan.
Visit our resource center to learn more about the significant retirement changes that may impact you and your financial plan.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.
