A Tax Planning Idea for IRAs

Introduction: Tax Considerations for “Non-Taxable” Estates

In the estate planning world there’s an informal divide between “taxable” and “non-taxable” estates, where “taxable” means at or near the estate tax deduction amount, a.k.a. the taxable threshold. Well, right now in 2025 that threshold is at $13.99 million per individual, so ~$28 million for a married couple. And Indiana has no state estate or inheritance tax. So “taxable” estates are rare indeed!

But that doesn’t mean a smaller estate can get away without any tax planning at all. The key point–which is obvious, but obscured by the habitual taxable/non-taxable focus–is that the estate tax isn’t the only tax to consider in the estate planning context. Income tax and capital gains taxes apply to (almost) everybody, and they can be substantial.

The estate tax isn’t the only tax to consider in the estate planning context!

So here’s the idea: why not borrow sophisticated planning strategies from the “taxable estate” world and apply them to income tax planning on non-taxable estates?

Today we’re talking about one possibility:

IRAs and Income Tax Basics

IRAs are a whole class of tax-advantaged retirement accounts. In a standard IRA, you get to contribute before-tax dollars in your working years and enjoy tax-free growth of investments in the account. In retirement you take the money out and pay taxes as you withdraw. The “tax deferral” of paying taxes on withdraw, instead of up front or each year, is (usually) a great advantage and lets you accumulate much more in your account than you would otherwise.

If you don’t use all the money in the account you can leave it to your spouse, or children, or any other beneficiary.

The “problem” is that your beneficiary has to empty the account, and thus pay taxes, rather quickly–the government doesn’t want people to defer taxes forever!

If you’re dealing with large sums, say an inherited IRA with $1 million left in it; and a short withdrawal window, like the 10-year rule currently in force for many accounts; then your beneficiary will have substantial income, and substantial income tax, in the withdrawal years.

IRAs in a Charitable Trust

What can you do?

Well, one idea is to put the IRA into a charitable trust. A Charitable Remainder Trust, the most common flavor of which is called a “CRUT” for short, has you put a lump sum into an irrevocable trust. Then for the term of the trust it pays out an annual income stream to a beneficiary. At the end of the trust term, whatever’s left over goes to the charity named in the trust instrument.

IRAs can go into a CRUT tax-free. So for a charitably-inclined person, leaving an IRA to a CRUT basically lets you:

1. continue to defer the taxes on the main corpus or “lump sum”;

2. provide a reliable income stream to a beneficiary of you choosing; and

3. give the remainder tax-free to a (qualified) charity

That’s a pretty good deal for the right person. And it’s not some dodgy scheme: the IRS encourages it! There are even sample forms.

Conclusion

Now you’ve seen one way that income tax planning can be part of an estate plan. Specifically, we can borrow planning techniques used by “taxable” large estates to save taxes on more typical estates.

It all comes down to what you need and what works best in your situation. I invite you to call Stautz Law, or book online, and get personalized advice for your situation.