Testamentary planning tools for your qualified retirement plan using a charitable remainder unitrust.
Interested in leaving a little something to a favorite charity? There are new ways to meet those heroic goals. The biggest hurdle is saving value at the same time for the remaining family.
For most people, a charitable bequest uses a cash transfer from the estate’s after-tax assets. Unfortunately, when using cash that the IRS has already taxed, it reduces the final value of those gifted dollars. A better way to control your estate is often to donate funds from your IRA, qualified retirement account or tax deferred annuity. Since these pre-tax dollars have not yet been devalued by income taxes, a greater donation can be made. This gift occurs without cutting value for your heirs, since the remaining estate assets can then be kept in the family.
Besides making a typical bequest in a will, there are other options that should also be explored. Of the many ways this might work to an advantage is the use of a “charitable roll-over”. In one example of its use, John Client has built up a retirement account of $300,000. Since there are other assets to fund his retirement, he wishes to leave the IRA proceeds to his disabled daughter. However, he knows that after estate and income taxes on the IRA, there will be less than $100,000 usable to pay for her future care. A better choice may be to name his Charitable Remainder Trust (CRT) as beneficiary of the IRA. The CRT would then annually pay his daughter a percentage of the trust’s value. By choosing an 8% payout, his CRT will create $24,000 free of IRA restrictions for his daughter’s use. At her death, the remainder interest in the trust then passes to either a named charity or a family foundation for management and distribution. Since the full amount of the IRA is available for investment and income production, this provides a more powerful way to protect his family; it may be worthwhile to compare the "stretch-out IRA" to the IRA/CRT technique, so consult your advisors for options.
Charitable roll-over techniques have the potential to create greater legacies for both sets of recipients. This unique transfer of qualified funds may be made through either a testamentary or an inter-vivos document, depending on your goals. For clients desiring more direct control of the future flow of funds, these useful tools can be further improved. By gifting pre-tax dollars to a charitable remainder trust or your family foundation, you cut out the government middle-man. The purpose of capturing this “social capital” is that personal assets are effectively managed and distributed by your family, instead of the IRS. In this way, your favorite charitable or community projects will have lasting support through a very visible gift. Your family will have some societal impact and you create a lasting legacy.
If estate taxes are not a major concern in your plan, then other choices about preserving value for the family can be evaluated. When there are highly appreciated stocks or property, there are two excellent ways to shift value. If the property is to be kept by the family, it is better to transfer those assets by will or trust to your heirs. In this way, the assets are inherited with a step-up in basis, which reduces future tax burdens on any eventual sale. If the property is likely to be sold rather than kept, then a CRT is an excellent way to improve income and minimize tax liabilities. A remainder trust coordinated with a wealth replacement trust then provides cash to the heirs in place of the gifted assets. This method also provides more incentive to support charitable programs in the community. The heirs then have an option of donating cash to the family’s charity and taking a deduction on their own income tax return. In the more traditional approach, when the appreciated asset is directly donated to the charity, its value may not be as efficiently replaced.
There are some very creative ways to make charitable gifts and control social capital. If clients reduce tax liabilities and can also support good works through philanthropic programs, everyone benefits. As always, these can be very complex situations and you should seek expert advice to properly assess your options.
Vaughn W. Henry deals with planned giving programs and estate conservation, and is a member of the Central Illinois Planned Giving Council.
The information is provided as general education only. For specific information, contact your tax and legal advisors.
Disinherit the IRS
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There are powerful planning tools available to control family wealth and preserve closely-held businesses. Failing to stabilize and protect estate values is one of the classic errors in most estate plans. Avoid this situation
by consulting your tax, financial and legal advisors.
Vaughn W. Henry Henry & Associates Gift and Estate Planning Services
22 Hyde Park
Springfield, IL 62703 USA
Phone: (217) 529-1958 Fax: (217) 529-1959
E-mail: VWHenry@aol.com
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