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Giving Twice

Kathleen M. Rehl

MY ANDROID RANG on a sunny Saturday afternoon. The screen said it was from a police station. Hesitating, I took the call. My biracial son came on.

“I’m going to jail, Mom. But I didn’t do it.”

Instant memories, almost 50 years old, of police guns pointing at my African husband’s head and mine. Wrong profile of an interracial couple. It wasn’t us. Checking IDs, they realized we weren’t the suspects sought.

With my son’s phone call, I jumped into mama bear mode, hiring expensive and effective legal counsel to fight the charges against my son. Bottom line: Case dismissed.

That incident jolted me into modifying my estate plan. I’m sharing my personal story for readers who also may want to protect and stretch an IRA inheritance for their beneficiaries. Years ago, I named my adult son as the outright beneficiary of my traditional IRA. It seemed like a good idea. But I’ve changed my mind.

Here’s why. Over many years and careers, I funded several tax-deferred retirement accounts—a traditional IRA, plus various employer plans. I lived frugally and kept adding money to these accounts until I retired at age 72. That’s when I merged them all (except a Roth IRA and an inherited IRA) into my traditional IRA. Most of my living expenses are covered by Social Security, a small pension and other investments. In retirement, I withdraw only the minimum required annually by law. I don’t ever expect to deplete my now $1.7 million traditional IRA. Indeed, it’s the largest asset I own. As it continues to grow tax-deferred, it’s becoming a taxable ticking time bomb for my son as beneficiary.

In addition, if my son suddenly inherits this large IRA, it might be like winning the lottery. He could find it hard to resist sharply increasing his spending. Poor investments could lie ahead. Indeed, under pressure from others when he inherited his late father’s retirement account, that money was soon gone. As the mother who loves him and wants the best for him, I’d prefer that he receive my IRA over time, which will also spread out the tax bite.

Another factor: My son’s career history is mixed. Good corporate positions have been interspersed with independent contractor work and unemployment. It’s my understanding that today he doesn’t have any retirement savings, partly because funds were drained for living expenses during lean years. Now age 43, he has fewer years to save for retirement.

I want to give my son part of my estate outright. But I also want to provide ongoing income in a tax-efficient manner. He agrees that he needs this protection. So does my elder law attorney.

The 2019 SECURE Act shook up the IRA distribution rules for inheritors. The law eliminates the ability to stretch IRA withdrawals over a lifetime for almost everyone except a surviving spouse and children under age 18. After I pass, my son must withdraw and pay taxes on all the money he inherits from my IRA within 10 years. This change doesn’t affect IRAs inherited before 2020.

The death of the so-called stretch IRA means my son, as beneficiary of my IRA, will see a sharp increase in his taxable income for 10 years after my death, likely during his peak earning years. Before the SECURE Act’s passage, he might have withdrawn money over his lifetime, reducing the tax bite.

To protect my son and grandson, I’m creating a tax-exempt testamentary charitable remainder unitrust (T-CRUT) to be funded with $1 million from my traditional IRA when I die. The T-CRUT will be a partial beneficiary of my IRA. No tax will be due on this transfer because the charitable trust is tax-exempt. My T-CRUT will pay 6% of the trust’s value annually to my son in quarterly payments for 20 years. If he dies prematurely, income will continue for my grandson for the remainder of the 20-year term.

Some important details: To qualify as tax-exempt, T-CRUT payout rates for your income beneficiaries must be at least 5%. Typically, you’ll want to start with an IRA worth at least $250,000. After all income payments are made to your beneficiaries, the T-CRUT must be projected to give a minimum of 10% to charity. This is actuarially determined based on the IRA’s expected remaining value. My son will pay income tax on the payments he receives each year.

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Over my many years as a financial advisor, I helped several clients establish T-CRUTs, even before the new SECURE Act. I know this approach works.

After 20 years, money remaining in my T-CRUT will transfer to a national nonprofit, establishing a named endowment to benefit a cause dear to my heart—promoting racial justice. I see it as a win-win. First, my son or grandson will enjoy 20 years of income. Then, the remainder goes to the nonprofit.

Because my tax-exempt T-CRUT won’t be subject to taxation in the way an inherited IRA usually would be and because it will have 20 years to grow, my son may inherit more money overall. It’s a great way to overcome the new mandate to empty an inherited IRA in 10 years and instead create a 20-year annual income stream. Assuming my T-CRUT’s net investment return is 6.5% with a payout rate of 6% in quarterly installments, I expect the benefits shown in the table below.

For more details, go here to view a table created using Crescendo planned giving software. If you decide to go this route, be sure to discuss your plan with a knowledgeable attorney and tax expert. Intrigued? Here’s a summary of the pros and cons.

T-CRUT advantages:

  • Spreads income payments to heirs over more than 10 years. It could be 20 years or even over their lifetime.
  • No taxes paid on the remaining IRA when it’s distributed to charity.
  • Reduces income tax for heirs.
  • Provides tax-deferred growth inside the trust.
  • Protects IRA’s value from creditors or others who may negatively influence heirs.
  • Heirs may end up with more money than if the IRA was left to them outright.
  • If you change your mind during your lifetime, you have the flexibility to change or even scrap the T-CRUT plan.
  • Can generate a charitable estate-tax deduction for large estates.
  • Continue supporting your values after you’re gone.

T-CRUT disadvantages:

  • Creating a trust is more complex than an outright gift to heirs.
  • Needs an attorney to draft the document.
  • May require certain administrative expenses to create and maintain the trust.

While a T-CRUT may result in more income over a longer period to your heirs, it won’t maximize the immediate transfer of wealth. In other words, you typically need to be charitably inclined for a T-CRUT to make sense.

Not sure you want all the bother involved? As an alternative, consider a testamentary charitable gift annuity (T-CGA). Funded when you die, this gives lifetime income to your heirs after you’re gone. A T-CGA can work well even for modest sums and the income payout to beneficiaries can be reasonable, assuming the beneficiaries will be age 65 or older when the payments start. After all income payments are made, the account balance goes to the nonprofits you designated beforehand.

Kathleen M. Rehl is retired following a career in financial planning and an “encore career” of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. Her previous articles were Final ThoughtsBetter Than Golf and Merging Money. You can learn more at www.KathleenRehl.com.

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DrLefty
DrLefty
2 months ago

Awesome article. I’d never heard of either of these vehicles, and I have some similar considerations with my adult kids and a strong commitment to charitable giving. Thanks so much.

I went back and looked at your other HD pieces and your website, and I just want to say that you seriously rock. I want to be like you when I grow up.

Kathleen M. Rehl, Ph.D., CFP®
Kathleen M. Rehl, Ph.D., CFP®
1 month ago
Reply to  DrLefty

Thanks for your comments. Sounds like this may be a strategy that can work for you also.

John Yeigh
John Yeigh
2 months ago

Great article as spreading out the inherited income during beneficiaries’ peak earnings years could be a winner. In addition, it not only protects beneficiaries from themselves, the slow access to the inheritance also somewhat protects them against the potential for a ‘golddigger’ spouse situation.

Kathleen M. Rehl, Ph.D., CFP®
Kathleen M. Rehl, Ph.D., CFP®
1 month ago
Reply to  John Yeigh

Bingo! You’ve identified a particularly important benefit of this type of plan, in the right situation.

Kenneth Piehl
Kenneth Piehl
2 months ago

Excellent article.

Kathleen M. Rehl, Ph.D., CFP®
Kathleen M. Rehl, Ph.D., CFP®
1 month ago
Reply to  Kenneth Piehl

I appreciate your reading my story.

Roboticus Aquarius
Roboticus Aquarius
2 months ago

Wow, I wasn’t aware of such a thing. Great suggestion!

Kathleen M. Rehl, Ph.D., CFP®
Kathleen M. Rehl, Ph.D., CFP®
1 month ago

In prior careers as a nonprofit planned giving officer and later as a certified financial planner, I helped clients/donors to establish dozens of charitable trusts and gift annuities. Depending on the individual circumstances, these plans are wonderful–both for the families and their charitable organizations. Thanks for your comment.

Don Southworth
Don Southworth
2 months ago

Thank you for all the excellent information and sharing about your family. Great story about how acts of injustice can lead to positive change – even in our personal lives.

Kathleen M. Rehl, Ph.D., CFP®
Kathleen M. Rehl, Ph.D., CFP®
1 month ago
Reply to  Don Southworth

Yes, so true. Although I previously thought about creating this plan for my son, it was the frightening incident that propelled me forward. I wrote my story to encourage others to also think about what influence they want after their death–to benefit both their family and their values. I appreciate your comment.

Ormode
Ormode
2 months ago

With modern lifespans, “children” typically inherit their parents’ estate between the ages of 50 and 70. With early retirement pretty common, inheriting an IRA that has to be taken over 10 years might prove very useful to many 60-year-olds. They could postpone taking SS until age 70, and leave their own retirement accounts intact until age 72.

Kathleen M. Rehl, Ph.D., CFP®
Kathleen M. Rehl, Ph.D., CFP®
1 month ago
Reply to  Ormode

Every situation is unique. Yes, for many individuals your suggested strategy would be appropriate. However, not so for my son. With his disability and other problems, he will need the protection provided by this T-CRUT. Thanks for your thoughtful response to my story.

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