Stautz Law

Tag: Charitable Remainder Trust

  • IRAs and Charitable Trusts: Video Follow-Up

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    Hi, it’s Andy Stautz at Stautz Law.  

    Today is a bit of a follow up video about a text-only post I made earlier, and this one’s about IRAS and Charitable Trusts.

    Did you miss the Charitable Trusts Basics? Go Back and Watch!

    So IRAs, individual retirement accounts: construed broadly to include 401(k)s and Roths. All of these structures. Powerful tax savings vehicles. But eventually the tax deferral has to end. The government’s gonna get its money!  

    And so a common tax problem is for your beneficiaries. If you have a sizable IRA and you don’t spend it while you’re alive, your beneficiaries are going to get a lump sum that they have to take as taxable income fairly quickly. And you know this is in the “good problems to have” category, in that we’re dealing with lots of money and just how much of it goes where: taxes, your beneficiaries, or charity. 

    One clever idea that I want to propose is putting your IRA into a charitable remainder trust. So the idea is you take your IRA, which is tax deferred. (We’re assuming tax deferred.) You put it in a charitable remainder trust. It goes in tax free. So you’re continuing the deferral. That’s great.  

    You set up the charitable trust. Let’s assume it’s a CRUT. You set it up to give an income stream to your beneficiary, just like if they had inherited the IRA directly. But you can use the trust to you know, stage the income over time. And it’s taxable income to your beneficiaries, just like if they’d received the IRA directly, but hopefully you can shape it a little and find some savings there.  

    And then at the end of the trust term the charity gets the remainder, which is hopefully substantial. And if it’s a qualifying charity they get it tax free. So you’ve got infinite tax deferral. At least with regard to that part.  

    So you know potential win-win here: you can save on income taxes, you can keep the tax deferral going, can make a substantial gift to charity. Don’t let the tax tail wag the dog. But if you’re charitably inclined, it can be a great scheme. 

    And that’s kind of one step up in terms of charitable planning over simply gifting appreciated assets. You know you’re gifting appreciated assets. But you’re doing it while still steering some income to a non-charitable beneficiary if that’s something you’re interested in.  

    It’s a fun idea. I’d love to talk about it with you. Obviously it’s got to be tailored to your situation and set up right. So you can book your initial planning meeting online or you can give me a call. And I look forward to working with you soon. 

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  • Charitable Remainder Trusts: The Basics

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    Transcript

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    Hi, it’s Andy Stautz with Stautz Law. We’re back talking about basic estate planning techniques. Today, not so basic. We’re talking about charitable remainder trusts.  

    A charitable remainder trust is, as its name suggests, a trust with a charitable purpose. And the remainder part refers to when the charity gets the trust proceeds.  

    So the scheme is the charitable remainder trust is set up once, and the settlor (or grantor) puts a lump sum into the trust. And receives a charitable deduction for part of the value of that lump sum in the year that the trust is made.  

    There’s an upfront contribution to the trust, it’s a one time thing, and then there’s a partial charitable deduction on income taxes. And the formula for that is complicated. But you know, it’s maybe 1/3 of the value of the trust corpus.  

    [O]nce the trust is funded, it then pays out an income stream over the next however many years. And that can be a term of years, you know, 20 years or it can be the lifetime of a beneficiary.  

    The way the income stream is determined changes the flavor of the trust. So you can say the trust is going to pay out $10,000 a year and that way it works like an annuity. And that’s a charitable remainder annuity trust—a CRAT. Or you can say well, the trust is going to pay 5% of its value every year. That makes it a unitrust—a CRUT. In either case, though, you’ve got a beneficiary receiving some income stream from the trust corpus for some period of time. That’s called the lead interest.  

    And then, OK, wait, what about charity? Well, charity gets the remainder interest. The charity gets whatever’s leftover after that income stream (term of years, life of a beneficiary) expires.  

    So that can be a good planning tool for a charitably minded donor. You know you can create this as an inter vivos trust, during life; you can create it as a testamentary trust.  

    But oftentimes the settlor will put assets into the trust to provide for someone else. Maybe an adult child with a creditor problems or other problems . . . To kind of give them that income stream and then whatever leftover to charity. And depending on the performance of the trust that can be a win win.  

    So that’s the basics. And as you can see, it’s a pretty complicated structure. You’re going to want help setting it up there are some IRS rules that I haven’t had time to discuss here about, you know, the amount of payout, the length of the term, you know, make sure it’s set up right so it’s going to qualify for all those tax benefits and going to work like you want.  

    Happy to discuss it with you and personalize it to your situation. I think it’s a fascinating planning tool. So book your initial meeting or give me a call. And I look forward to working with you soon. Thanks and bye!

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