IRA Charitable Beneficiary through Living Trust
The wife and I have a Living Trust with all of the other trusts and pour over wills and power-of-attorney’s. Some key attributes of estate/trust:
– A large part of the estate will be in IRA’s and Roth’s and thus outside of the trust.
– The surviving spouse gets to use any part of the estate including the IRA’s/Roth’s during lifetime.
– After the passing of the last spouse, as long as each child is guaranteed so much including IRA distributions, then X% of the ENTIRE estate is be distributed to named or non-named (certain types of medical research, say, to be determined by the trustee and trust wording) charities.
– The trust creates a charitable and non-charitable part to satisfy first the charitable distributions and then the rest goes to the children.
– The trust itself may not be large enough to satisfy the charitable distributions, estate expenses, etc. and may need some of the IRA assets.
I know that Ed Slott strongly warns against leaving money to a trust. Unfortunately, the best solution seems be to create a new IRA that contains most of the funds needed to satisfy the trust charitable distributions. Assuming I pass before my spouse, I propose to create this new IRA as follows:
– Fund new IRA to approximately size with future growth of that of the charitable distributions.
– Make primary beneficiary the spouse and the secondary beneficiary the trust so spouse can use IRA if needed.
– After I pass the spouse would promote the secondary trust distribution for charities to primary.
– After death of last spouse, the trustee would receive the IRA distribution hopefully before the next September after death deadline and distribute it to the named and non-named charities before settling the estate.
[color=#FF0040]- Does this strategy sound feasible?
– Any concerns?
– If we are receiving RMD’s does this approach require taking them even if the charitable distributions take place before the next September deadline?
– Any suggestions on whether the IRA should just send the money to the trust or should it specifically mention that it needs to go to the charitable part? I see a benefit of sending it to the trust should the IRA be larger than needed to satisfy the charitable distributions and the trustee has the power to take funds from the trust for the charities under prescribed conditions guaranteeing the children their payouts.[/color]
Permalink Submitted by mk foss on Fri, 2011-02-04 02:50
If you have charitable intentions, naming a charity or charities as IRA beneficiary(ies) is a good strategy.
Naming the charities as contingent benefiiciaries with your spouse as primary is unlikely to achieve the result you deisre. Once you’ve passed away the spouse could rollover the IRA and name her own beneficiaries. There will be a lot of pressure to name other family members other than charities. If she fails to do a rollover, the IRA benefits at her death will go to charity only if she affirmatively makes that designation. The fact that the charities had been contingent beneficiaries is disregarded.
In calculating RMDs during your lifetime – all IRAs are considered but the RMD is not required to be withdrawn ratably from each. Once you calculate the RMD you could take larger amounts, smaller amounts or no distributions from the IRAs with a charitable beneficiary to keep the balance at the level you wish to transfer to charity. If there’s extremely large growth in the IRA with a charitable beneficiary, you can transfer some of the funds to another IRA to keep your charitable intentions in line.
Permalink Submitted by Bruce Steiner on Sun, 2011-02-06 00:23
A forum such as this can be useful for providing general information, but not for specific advice. The original poster should consult with competent tax/estates counsel who can provide him with specific advice based upon the particular facts and his objectives, particularly if the estate is large enough that he is considering making substantial provisions for charity.
We generally have our clients provide for their children in trust rather than outright, to keep the inheritances out of the children’s estates, and to better protect against the children’s potential creditors, including spouses. The reasons for leaving assets in trust rather than outright apply to IRAs as well as other assets.
In allocating assets between children and charities, you should keep in mind the different tax treatment of traditiona IRAs, Roth IRAs, and other assets.
Be careful before running an IRA through a living trust. It can create lots of problems.
Permalink Submitted by Gerald D on Sun, 2011-02-06 21:09
Thank you for the replies. I would like to assure each that we are talking to both our lawyer and the investment company that manages out IRA and Roth assets. We are concerned about whether our lawyer that wrote our trust is on top of the issues and strategies necessary to make this work. And even though I am NOT a lawyer or CPA I read (make that scanned) the following book suggested by the investment company lawyer: “Life and Death Planning for Retirement Benefits”, Sixth Edition 2006, by Natalie B. Choate. This (complex) book seemed to favor a separate IRA for charities which I believe I mimic in my approach.
Regarding the concern about the surviving spouse failing to promote the charitable distribution to the trust after the first passing, this is a known concern but one in which trust is needed. I guess another concern would be one of competency of the remaining spouse to promote the trust charitable distribution. We do not desire the funds to be passed on the first death and we do want the comfort that the surviving spouse will have access to the assets should they be needed at the first death or throughout his life. Besides, the trust has the responsibility to satisfy the charitable distributions and unless the trust is changed to violate this wish all assets of the trust would be subjected to satisfying the charitable gifts. This might require selling some illiquid and desirable assets like the house, but so be it.
Regarding the concern about leaving to the kids via the trust, we do not want to live their lives after we are gone. We have addressed some concerns about spouses or others getting the assets by making the IRA/Roth distribution “per stirpes” to insure that the kids children inherit. I believe the assets of any kid without children reverts to the other surviving kids. There should be modest assets actually left in the trust after charities and expenses are taken out, maybe the house and a few cars.
My reason for submitting our strategy to this forum was that it addresses IRA’s (and Roth’s) and I am sure that there are posters that see this kind of thing routinely. Ed Slott’s book warns about leaving IRA/Roth proceeds to a trust but it is not very detailed. Our approach is not to have the trust manage these assets for any longer than to give the ultimate trustee time to distribute the much of the liquid funds to the named and non-named charities. It seems to me that this process should be done before the final tax closing on the estate takes place provided the IRA and trust work together properly. This is my plea for opinions on whether this approach for funding the trust charitable part with IRA assets can be done and if there are any glaring gotchas that you can red flag.
Permalink Submitted by Bruce Steiner on Sun, 2011-02-13 13:35
I know that Ed has expressed some concern about trusts as beneficiaries of retirement benefits. The reason for this is that the stretchout is generally limited to the life expectancy of the oldest beneficiary of the trust. In other words, if you want to be able to stretch the distributions over the oldest child’s life expectancy, you have to make sure than no one older than the oldest child can ever receive any of the accumulated IRA distributions. Nevertheless, leaving assets (including IRA benefits) in trust rather than outright will keep them out of your children’s estates, and will better protect them against your children’s potential creditors (including spouses).
I wrote an article on trusts as beneficiaries of retirement benefits, in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.
Nevertheless, running IRA benefits through a revocable trust may cause additional problems and complexities. Even if there is some reason for creating a revocable trust in your case (we do them in some but not most cases, where there is a particular reason for doing so in the given case, though they may make sense in some states such as California), is there any reason to run the IRA benefits through the revocable trust here?
It should be possible to accomplish your 3-tier formula (first to the children up to $x, second to charity up to y% of the total assets, third in some way not described in your posts). But the drafting may be complicated. There are two reasons for this. First, the IRAs pass by beneficiary designation. Second, the 3 types of assets (traditional IRAs, Roth IRAs and non-IRA assets) have different tax characteristics. To the extent possible within the context of your desired division of assets between your children and charity, you’ll probably want the traditional IRAs to go to charity, and your Roth IRAs to go to your children. You may want to see if there is a simpler way to accomplish your objectives.
Creating separate IRAs for different beneficiaries (except for traditional and Roth) may create problems if the relative values change. It may be possible to draft around this, but this may add additional complexity.
If you are still concerned as to whether you are accomplishing your objectives in the best way, you may want to consult with sommeone more familiar with this.
Permalink Submitted by Alan Spross on Sun, 2011-02-13 20:57
Bruce,
Is this a potential problem, given the poster’s proposed pecuniary amount? His pecuniary amount is not for the charities, however could part of the Kenan situation still have a negative effect here?
http://www.pgdc.com/pgdc/news-story/2006/11/06/partial-assignment-decede…
Permalink Submitted by Gerald D on Sun, 2011-02-13 21:12
Mr. Steiner, thank you so much for the excellent article reference you provided.
Just to be clear for all of the discussion so far and below, all of our IRA’s are tax-deferred with no portion where taxes were already paid. Also, our thinking currently is that all trust assets would be distributed in a very short period, hopefully before the estate needs to be finalized. The only stipulation is that the youngest child needs to reach a certain age to receive trust distributions (but NOT IRA/Roth distributions) and that child is within a year or two of that age.
[quote=”[email protected]“]I know that Ed has expressed some concern about trusts as beneficiaries of retirement benefits. The reason for this is that the [b]stretchout is generally limited to the life expectancy of the oldest beneficiary of the trust. [/b] In other words, if you want to be able to stretch the distributions over the oldest child’s life expectancy, you have to make sure than [b]no one older than the oldest child can ever receive any of the accumulated IRA distributions. [/b] Nevertheless, leaving assets (including IRA benefits) in trust rather than outright will keep them out of your children’s estates, and will better protect them against your children’s potential creditors (including spouses). … [/quote]
We are very aware of the stretch feature of our IRA’s and Roth’s and have the vast majority of those retirement assets, and thus the entire estate, left first to the surviving spouse and then as secondary beneficiaries equally to the children, per stirpes. The intention is that the surviving trust owner will promote the children to the primary beneficiaries at the passing of the first spouse. In the revocable living trust there is no other beneficiary of the trust (and thus no older beneficiary) other than the children, several named and unnamed charities and a minor part to insure that the college expenses of the youngest child are paid before any other distributions.
[quote=”[email protected]“]Nevertheless, running IRA benefits through a revocable trust may cause additional problems and complexities. Even if there is some reason for creating a revocable trust in your case (we do them in some but not most cases, where there is a particular reason for doing so in the given case, though they may make sense in some states such as California), [b]is there any reason to run the IRA benefits through the revocable trust here?[/b] [/quote]
The [b]sole purpose for running the IRA assets through the trust[/b] by naming the trust as the primary beneficiary of a smaller IRA is to insure that there are sufficient funds to satisfy the charitable gifts without having to sell illiquid assets like the house, requiring assets from the children or borrowing funds. Another important goal is to make the gifts to non-named charities (i.e. various medical research organizations at the discretion of the trustee and children) easier and to avoid figuring out the beneficiary wording for these entities and any potential disputes with the IRA management company.
[quote=”[email protected]“]It should be possible to accomplish your 3-tier formula (first to the children up to $x, second to charity up to y% of the total assets, third in some way not described in your posts). But the drafting may be complicated. There are two reasons for this. First, the IRAs pass by beneficiary designation. Second, the 3 types of assets (traditional IRAs, Roth IRAs and non-IRA assets) have different tax characteristics. To the extent possible within the context of your desired division of assets between your children and charity, [b]you’ll probably want the traditional IRAs to go to charity, and your Roth IRAs to go to your children.[/b] You may want to see if there is a simpler way to accomplish your objectives.[/quote]
While we are living, we are converting significant IRA assets to Roth’s and paying the taxes out of non-retirement assets. This conversion will most likely stop when either of us reaches 70 1/2 and require MRD’s due to the potentially higher marginal tax bracket caused by these distributions. We fully appreciate the significant attribute of Roth’s that grant permanent tax-free distributions for the owner and eventual beneficiaries and we will NOT use a Roth to access funds so that it can stretch 2-3 lifetimes tax-free. As stated, all IRA and Roth distributions go to the children except the smaller IRA set up to fund the trust for charitable gifts.
[quote=”[email protected]“][b]Creating separate IRAs for different beneficiaries[/b] (except for traditional and Roth) [b]may create problems if the relative values change.[/b] It may be possible to draft around this, but this may add additional complexity.
If you are still concerned as to whether you are accomplishing your objectives in the best way, you may want to consult with sommeone more familiar with this.[/quote]
All IRA’s and Roth’s are left equally to the eventual beneficiaries, the children, and contain no threat of resulting unequal distributions. The only other IRA we propose is the one to fund the charitable gifts. We have almost equal investment goals for all IRA’s and Roth’s so all should grow at a similar if not exact same rate. The newly split off charitable IRA may grow larger than needed to fund the charitable gifts so we can either underfund it a bit or periodically remove some funds and send them back to the original IRA which may be more tedious. There will probably be a good chance that the trust would have sufficient funds to make up for a modest underfunding of the gifts.
We hope that this makes our intentions clearer. There is the one question below on which we would appreciate some further advice:
[color=#FF0000]- Any suggestions on whether the IRA should just send the money to the trust [u]or should it specifically mention that it needs to go to the charitable part[/u]? I see a benefit of sending it to the trust should the IRA be larger than needed to satisfy the charitable distributions and the trustee has the power to take funds from the trust for the charities under prescribed conditions guaranteeing the children their payouts.
[/color]
Thank you again so much for your valuable advice in this extremely complex area.
Permalink Submitted by mk foss on Sun, 2011-02-13 23:57
There is a concern with a “pecuniary gift” to charity from an IRA. A pecuniary gift is a dollar amount and when an estate or trust specifies that a dollar amount be paid from an asset subject to income tax like a retirement account it is treated as if the estate or trust recognized the amount of income and then made a charitable deduction. There is no income tax deduction for a specific bequest to charity so that it makes the use of the IRA for charitable intentions a bad idea.
That’s why naming a charity as a beneficiary has been recommended. There’s no income to the individual’s estate or trust associated with a charitable transfer of all or a fraction of an IRA account.
There have been instances where someone has left a “fractional interest” that have not triggered any taxable income. This fractional interest would come close to describing the dollar amount without actuall specifiying the dollar amount. This can be tricky and needs expert drafting – so another reason to name the IRA directly is for simplicity.
I don’t think it would be that difficult to manage the size of an IRA payable to charity. Say for example, you wanted to give $50,000 to charity and had $300,000 of IRAs. You could transfer $50,000 from the IRAs to a new IRA with only charitable beneficiaries. The next year when you determine your RMD of say $12,000 – you look first at the charitable IRA which is now $51,250 – you take $1,250 from that one and take the balance from other accounts.
Permalink Submitted by Bruce Steiner on Mon, 2011-02-14 00:27
Alan and Mary Kay raise a good point. If it is necessary to satisfy the first tier amount payable to the children with retirement benefits, that will accelerate the income. IRS Chief Counsel Memorandum (which is like a private letter ruling) 200644020.
This plan is sufficiently detailed that the only way to comment intelligently on it would be to review the actual documents. But I think it would be more efficient to start with the facts and the desired objectives and draft a plan to best accomplish the desired objectives than to analyze the existing documents.