Charitable Remainder Trusts

[thinkingbig]

I’m looking for input from anyone who might be smart on the topic. My main goal is to address the situation where my spouse and I both pass while our kids (2 of them) are “young”, they are mid/late teens now, my concern is for about the next 10 years. My wife and I have qualified retirement savings (401Ks). Under the new inherited IRA rules they would only have 10 years to spend down the accounts (no more stretch IRAs). This is problematic for several reasons. First and most important is that 1/10 of 401K (so 5% each if both survive us) is more than I want them to have at that stage (through 20s) of life. It is quite a bit more than they are likely to be making at even a college graduate level salary for example. I want the money to come to them later in life. Second reason is taxes, their incomes from the distribution will all be taxed as regular income and the IRS will end up with a lot of their inheritance.

In searching for solutions the only thing that came up is the Charitable remainder trust but this doesn’t seem viable. With the 5% minimum annual distribution and the requirement for 10% of starting value (as would be funding on spouse and my death) to go to charity their life expectancy as teens/twentysomethings eliminates the math from working as 5% per year over their lives depletes the funds.

Does anyone know of another mechanism to address my situation or know a workaround that allows a Charitable remainder trust to be set up from someone under age 25-30?

Thanks for any advice

[JAFO31]

thinkingbig: "I’m looking for input from anyone who might be smart on the topic. My main goal is to address the situation where my spouse and I both pass while our kids (2 of them) are “young”, they are mid/late teens now, my concern is for about the next 10 years. My wife and I have qualified retirement savings (401Ks). Under the new inherited IRA rules they would only have 10 years to spend down the accounts (no more stretch IRAs).

The funds do not need to be spent. They need to be withdrawn from the IRA. Those are two very different issues.

“This is problematic for several reasons. First and most important is that 1/10 of 401K (so 5% each if both survive us) is more than I want them to have at that stage (through 20s) of life.”

I follow so far. You could cap distributions to them and have the balance of the RMD donated to a charity.

“I want the money to come to them later in life.”

Charitable remainder trust sends the corpus to a charity, not to your kids later in life.

“Second reason is taxes, their incomes from the distribution will all be taxed as regular income and the IRS will end up with a lot of their inheritance.”

Taxes from the distribution will be taxable as ordinary income regardless of the age at which they are required to take withdrawals.

“In searching for solutions the only thing that came up is the Charitable remainder trust”

See above. You would solve your second concern by converting to Roth IRA and paying taxes now so that none are due at withdrawal, but I doubt that is a good solution.

“but this doesn’t seem viable. With the 5% minimum annual distribution and the requirement for 10% of starting value (as would be funding on spouse and my death) to go to charity their life expectancy as teens/twentysomethings eliminates the math from working as 5% per year over their lives depletes the funds.”

I do not follow, either your example or your concern. If you want me to understand you will need to explain in more detail.

“Does anyone know of another mechanism to address my situation or know a workaround that allows a Charitable remainder trust to be set up from someone under age 25-30?”

It seems to be me that you need to talk to a good estate planner who is familiar with IRAs and taxes.

Regards, JAFO

[Hawkwin]

I think you might be overthinking this.

My quick thought is that you should first start by doing Roth conversions now to reduce the tax implications of the 10 year distribution schedule.* Create an irrevocable or testamentary trust that is the contingent bene of the Roth accounts.

Trustee takes the RMDs from the Roth accounts and puts the proceeds into the trust, then pays your kids from the trust based on the restricted schedule.

*The new shortened RMD schedule is very likely to result in many traditional 401k savers, or their benes, paying a higher tax rate on withdrawal than what they saved on deferral, thus making their lifetime savings punitively taxed.

[JAFO31]

Hawkin: “*The new shortened RMD schedule is very likely to result in many traditional 401k savers, or their benes, paying a higher tax rate on withdrawal than what they saved on deferral, thus making their lifetime savings punitively taxed.”

Are you sure?

https://www.cnbc.com/2022/07/30/vanguard-how-much-americans-…

Retirement Savings Account Balances:

Age 65+ Median - $87,700 Average - $280,000

Obviously, those with very high balances are skewing the average up to more than 3x the median.

The table gives give the standard deviation but some deductions are obvious.

Those with median and below balances will only see $9,000 per year distributions to non-spousal or “non-protected” beneficiaries.

That amount will not likely throw a single beneficiary into a higher (let alone significantly higher) tax bracket than the saver/decedent. Spread that $9,000 over 2-3, or more children it becomes even less likely.

Even at the average balance amount, that might be $29-30,000. For a single beneficiary, that will probably move than up one tax bracket; with two beneficiaries, $15,000 may likely move them up one bracket. With 3 or more beneficiaries, you are are $10,000 or less per year for each beneficiary, which is the equivalent of the bottom 50% through the median going to a single beneficiary.

The beneficiaries that will pay are those that inherit large amounts but that will not be a large percentage of savers/decedents but the supersavers, and the supersavers were probably in a high tax bracket for most of their saving years.

https://www.google.com/search?q=average+and+median+401-k+bal…

Average 401k balance

Age 50-59 Median - $62,700 Average $206,100

You can apply the same analysis.

Add the two medians (though I know that this is not good math) and it is $150,400; over ten years that is say $16,000. That probably bumps up a single beneficiary but how likely is a bracket bump for $8,000 (two beneficiaries) or $5,400 (three benes.) or $4,000 (four benes.)?

It is not an insignificant worry for those with large balances, but it is definitely a first-world problem that will not affect the majority of savers/decedents…

Regards, JAFO

[Hawkwin]

Are you sure?

Am I sure that(to quote myself), “many traditional 401k savers or their benes will pay a higher tax rate…”

Absolutely.

You incorrectly conflate my “many” to be the same thing as the “median” or “average.”

I work with many a middle income household (my two married teachers come to mind) that have amassed over $1 million in retirement savings over their lifetime and for which they are unlikely to spend. Their children are very likely to pay a much higher tax rate on that money if they inherit it as traditional IRAs.

Additionally, your goggle search is of “balances” per account and not total savings (and why not link to an actual article or study instead of just a search result?!?). It is not uncommon for savers and households to have more than one balance. My wife and I have eight different retirement balances between us (401k, IRA, Roths 403bs, 401as, pensions, etc.

Per the below link, it is estimated that the top quintile of retirees age 70-74 have over $500,000 saved in retirement accounts. The top 10% have $1,000,000. Similar results are found for those 75-80 and those 80+.

10-20% of all people age 70+ certainly fits my definition of “many.”

https://dqydj.com/retirement-savings-by-age/

[Hawkwin]

In reply to myself; because I neglected to cover one important point:

I work with many a middle income household (my two married teachers come to mind) that have amassed over $1 million in retirement savings over their lifetime and for which they are unlikely to spend. Their children are very likely to pay a much higher tax rate on that money if they inherit it as traditional IRAs.

The aspect I did not include (and why I picked age 70+) is that those same clients now have RMDs that are pushing them into the next tax bracket - and making their qualified dividends and LTCG taxed more. This is especially true for widows/widowers.