When more post-death control over the inherited IRA is desired, the IRA can be left to a CRT (charitable remainder trust). At death, the full amount of the IRA passes to the trust with no tax erosion, providing yearly payments to the CRT beneficiaries, usually children. Then, after a term of years or when the CRT income beneficiary dies, the remaining CRT funds pass to the charity.
However, this is an example of charitable giving that should not be done solely for tax reasons. There needs to be a charitable intent. With the CRT strategy, the funds eventually go to charity, not to families. Unless the beneficiary payouts lasts for decades, this would not provide a tax advantage. In addition, to prevent a loss to the beneficiary’s family in the event of an early death, the CRT should be coupled with a life insurance policy on the beneficiary to provide for that family.
Update IRA Estate Plans
Year-end is a good time to review estate plans. For those clients who wish to give to charity, have them update their estate plans to fund charitable bequests with IRAs instead of using other non-IRA funds. This will leave family beneficiaries with more non-IRA funds where they can receive a step-up in basis and less in taxable IRA money. Beneficiaries will end up receiving more by paying less to the government.
Whip Inflation Now!
Comedian Henny Youngman also famously said: “I’ve got all the money I'll ever need, if I die by four o'clock.” Clients who ignore these growing IRA tax bills may end up in the same boat. Be a proactive advisor and help clients really whip inflation now by saving lots of money that would otherwise be going to Uncle Sam.
Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group, please visit www.IRAhelp.com.