Retirement Planning and Charitable Remainder Trusts

For all the benefits of the SECURE Act, those wishing to put down non-spouse beneficiaries on IRAs and other retirement plans have had to come up with creative ways to avoid a large tax bill for those beneficiaries. Under the current rules, non-spouse beneficiaries must withdraw the entire amount from the plan within 10 years after the owner’s death or pay taxes (there are a few other exceptions for non-spouses).

One way you can get around this is by designating a Charitable Remainder Trust as the beneficiary for your IRA. There are some extra considerations you need to address if you choose this route, but our firm strongly feels the benefits far outweigh the extra work on the front end. 

What is a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable trust, meaning you cannot change its terms while you, the trust creator, are still living. These trusts are primarily used for tax savings; in this context, they are used so beneficiaries can receive distributions from IRAs over a longer period of time while paying less taxes – tax deferred retirement accounts are taxed as the recipient’s income tax rate, and charities have a zero income tax rate. Additionally, trust creators can get creative with the manner of distributions to beneficiaries. 

How a Charitable Remainder Trust Works

Let’s say you are the owner of an IRA. You’re no longer married, so your children are the beneficiaries of your IRA. You set up a charitable remainder trust for all the benefits explained above; the trust is not funded with the retirement funds until you pass away. When you set up the trust, you designate the $500,000 death benefit to be funded into the trust. Instead of your children feeling pressured to withdraw every last penny within 10 years, you set up a Charitable Remainder Unitrust (CRUT) that allows your beneficiaries to receive an annual percentage of the trust’s $500,000 at certain intervals. 

Alternatively, you could set up a Charitable Remainder Annuity Trust (CRAT), which distributes beneficiaries a set amount of payments at regular intervals. Because you have set up a Charitable Remainder Trust for your children, you can rest easy knowing that your kids will not be pressured to receive their full distributions all at once. Even someone in his or her 20s might not be well-equipped to spend a large amount of money responsibly. 

If there is any money left over in the trust when the term of the trust expires or the beneficiaries passes (you get to choose with some restrictions), it will go to a charity of your choice. So, the benefits of naming a Charitable Remainder Trust as the beneficiary of your IRA is three-fold:

  • You are able to dictate the terms of your beneficiaries receiving distributions from the plan.
  • Your beneficiaries will receive a greater amount of the money from the plan (by avoiding certain taxes).
  • Any money left over will go to causes near and dear to you. 

Our firm is passionate about helping California business owners and estate planners pass on more of their hard work to the next generation while paying less in taxes. We like to get creative when figuring out the best strategy for each client. Fewer than 100 attorneys nationwide are also Certified Tax Coaches, and we are proud to feature one of them at our practice. 

Ready to get started? Contact us today to get started on your consultation.

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Dahl Law Group

At Dahl Law Group, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning.

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