It is often said that charitable strategies only make sense for the truly charitable. In almost every case, this proves to be true. There must be true charitable intent for the charitable vehicle to make financial sense because even when taxes are steep for income/estate, you or your loved ones usually end up with more money in hand when distributed outside of a charitable vehicle compared to the charitable option.
We may, however, be entering into new territory in 2017. There is talk that the stretch-IRA may be on the chopping block, which would force those who inherit IRAs to distribute all of the assets (at a forecasted steep tax consequence) within the first five years instead of being allowed to stretch it out throughout their lifetime. While this has been discussed in the past, economists believe this could be the year we see it happen since it would result in increased tax revenue for the government – money that will be needed to fund the high-cost plan put forth by “Trumpenomics”.
If this happens, it may make Charitable Remainder Trusts (CRT) a more attractive option because it may mean that individuals’ loved ones are able to keep more of the money in their IRA’s after their death than if they had to distribute the assets within the first five years. For the first time, people may be considering Charitable Remainder Trusts even when they aren’t very charitable at all. This would mean that individuals would no longer be forced to choose between money in the hands of their loved ones or money in the hands of the government. Instead, they can keep money out of the hands of the government without sacrificing inheritance to their loved ones. With this logic, it would be a win/win – more money to their loved ones and less taxes – even to those who wouldn’t ordinarily consider a charitable strategy like this.
Consider this real life example: Fred is a forward-thinking man who decides to set up a testamentary Charitable Remainder Trust through his estate planning attorney that will be funded with assets from his IRA and will ultimately benefit a local organization. Fred is unmarried and has one daughter, Diana. Under the advisement of his advisors, he lists his daughter, Diana, as the primary beneficiary of his IRA. In order to not be forced to take a higher minimum distribution during his own life (which would happen unless a non-charitable beneficiary is listed as the majority beneficiary), he lists the Charitable Remainder Trust as the minority beneficiary or his IRA (49% or less). His attorney also helps him by adding in disclaimer language to the IRA beneficiary designation, which allows Diana to disclaim whatever portion of her inherited IRA that she will not be taking as a distribution within the first five years after Fred’s death. Fred explains the plan to his daughter, Diana, with the assistance of his advisors. At Fred’s death, the IRA has $1 million in assets. As the Primary Beneficiary (51%), Diana chooses to take $250,000, spread over the next five years. She chooses to disclaim her remaining $260,000, which enables $750,000 to be used to fund the Charitable Remainder Trust. The CRT then pays Diana income over the remainder of her life (let’s say 6% or approximately $45,000 per year), thereby creating a new “stretch IRA.” At the end of her life, the CRT pays out whatever is left over to the local charity that Fred chose as the non-profit beneficiary of the remainder. In this case, the trust assets were invested and, even after distributing income to Diana during her lifetime, there was more than $200,000 received by the local charity of Fred’s choosing.
While there are expenses associated with both the setup of a CRT and the yearly filing fees, it is possible that the tax consequences of distributing an entire IRA within the first five years (instead of over a longer period of time) could be more than both the fees and the 10% or more of the remainder that goes to the charitable organization combined. This could be a game-changer for non-profits and the way they market the use of the CRT to their donor/prospect constituencies, and may create an opportunity for them to market this to the general community and see real traction in a way they may not have seen before. Planned giving research has led organizations to believe that using tax-mitigation as a primary marketing message has proven largely ineffective. However, we see this as a true advantage for donors and charities considering the new circumstances.
Non-profits should be as proactive about this potential change as possible. Charitable Remainder Trusts are a very powerful way for organizations to engage in capacity building through funding of endowments, quasi-endowments, capital purchases and general operations for things like increased staff. Oftentimes, the money realized from CRT’s is a large amount received at a critical moment, and can mean big things, especially for smaller local organizations for whom receiving $100,000 or more at the end of the life of the trust could transform their ability to advance their mission.
If the general community starts to consider these vehicles for new reasons, like the abolition of the stretch IRA, nonprofits will be smart to want to be the first ones to suggest this to those who will newly be considering it because there is a renewed chance those individuals would consider them as a charitable beneficiary even if they have no prior connection to the organization.
For more information about this and other charitable strategies, please call 1 North Wealth Services at 410-975-0099. We are available to help both individuals and non-profits with their charitable planning needs.