A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies.
If your estate is over the estate tax exemption can it be reduced by naming a charity as IRA beneficiary?
If you have a charitable remainder trust, can you use the TOD provision of a brokerage account to add to the CRUT. The CRUT is exempt from gift taxes. Are contributions treated as charitable gifts in an estate?
Pourover in a will might be the best way to reduce estate tax liability, but IRA beneficiaries and TOD provisions are easy to change as circumstances change.
As long the beneficiary is a 501(c)3 charity, any amount donated will not count toward your estate, whether the asset is a retirement account or any other type of asset. If the beneficiary for any asset is not a 501(c)3 charity, then it counts toward your estate.
Not sure why you’d do a TOD to a CRUT - it seems to defeat the purpose of being able to provide income while you’re alive, which is what CRUTs were designed to do. That said, the assets already in a CRUT are exempt from gift and estate taxes. But additional contributions to a CRUT are subject to gift taxes if they exceed the gift limit. If you choose to do a TOD contribution, then the amount contributed to the CRUT on your death would still be a part of your estate (just like any other TOD asset that’s not going to a 501(c)3 charity) and subject to the estate tax, since the assets are not transferring directly to the 501(c)3 charity, but to the CRUT. The CRUT will then transfer the assets to the 501(c)3 charity, and they will be exempt from gift and estate taxes for that transfer. You’d be better off leaving the TOD gift directly to the 501(c)3 charity that is the beneficiary of the CRUT, so it would not count as a part of your estate that is subject to the estate tax.
Huh? Pourover in a will is just a way to designate a beneficiary for assets that don’t have a designated beneficiary, via either your will, a trust, a TOD, etc. So if you failed to designate a beneficiary for an asset (like a car or a bank account), the pourover clause of your will designates the beneficiary. Pourover doesn’t reduce the size of your estate, unless you are leaving the pourover assets to a 501(c)3 charity, so it doesn’t reduce your estate tax liability.
Thanks, AJ. I’m using the CRUT to pay assets to my heirs as beneficiaries (as a down payment on their inheritance) and avoid the gift tax problem by keeping annual payments to my heirs below the gift tax exemption.
If I am deceased, transfer to CRUT would allow my heirs to collect a portion (7% per year) of the additional assets. As I am deceased the gift tax limit no longer applies. The CRUT does allow additional contributions but the idea that contribution are limited by gift tax exemption is news. (The initial payment is specifically exempted from the gift tax.) And of course if the trust is treated as a charity, this becomes an interesting way to reduce estate tax liability.
Okay - so you (and/or your spouse, if applicable - and yes, I know you’re not married) are not the only beneficiary receiving the income.
CRUTs are only exempt from gift taxes when you (and/or your spouse, if applicable) are the only beneficiaries receiving income. If others (like your relatives) are receiving the income, then gift taxes are applicable.
That’s the thing - gift taxes for CRUTs are based on the income stream to the beneficiaries, but given that in prior threads, you had indicated:
Based on the original contributions creating that horse race, and the fact that each year, the CRUT needs to distribute a fixed percentage of assets, not a fixed dollar amount, additional contributions to a CRUT would increase the total assets in the CRUT, pushing the income stream into being subject to gift taxes.
The problem with keeping an income stream based on a percentage of assets below the chained CPI (which is what inflation for taxes is now based on) when the growth rates are significantly higher than inflation means that you probably need to distribute more than the expected growth rate of your portfolio. But then you run into the problem that if you have a string of bad years, at the end of the trust term you need to have at least 10% to distribute to the charity - so over distributing isn’t really an option.
AJ, if you could clarify something I would very much appreciate it. What is meant by counts toward your estate, and how does that relate to an IRA? I’ve been under the impression that IRA distribution to beneficiaries are unrelated to everything else. Thanks!
There is an annual gift tax exemption. You are allowed this year $18k per person. Above that you file a gift tax form with the irs. Amounts over the exemption get deducted from your “unified” estate tax exemption. So effectively your estate pays 40% tax on your gifts over the exemption.
This year the estate tax exemption is $13.61MM for singles or double that for married couples.
Most people are far from the estate tax exemption and don’ t worry much abt gift tax, but once you cross that estate tax line the tax man is everywhere you turn. The rate is 40% and up.
A million dollar estate tax liability should get your attention. It comes out of your heirs inheritance.
Both the gift tax exemption and the unified estate tax exemption are adjusted for inflation each year. 2025 number are note yet announced but expected to be abt $19k and $13.9mm.
AJ, the gift tax is on payments to beneficiaries but is paid by the settlor as part of his estate tax. Not on the contribution to the CRUT.
When the settlor is deceased what happens to the gift tax? The CRUT continues for the specified period or until the death of the last beneficiary.
As to charitable deductions, contributions to the CRUT get a partial deduction in the year of the contribution for the remainder amount that goes to the charity. In my case abt 25%. In the case of a death transfer you would expect partial reduction of taxable estate.
You can find the figures for C-CPI-U compares to CPI, and see that C-CPI-U is lower, but I think that the picture shows the difference very well, even if it’s older data.
Additionally, while the chained CPI YTD has been in the 2.4% range, S&P 500 total return YTD is over 22% and for NVDIA in particular has been over 85% Which means if you used Dec 31, 2023 to calculate a return on the CRUT assets of $18k per beneficiary, you will be fine for the 2024 income, but the 2025 income is quite likely to be larger than $19k - if the gift limit actually does increase to that, and doesn’t stay at $18k. That means that any additional contributions for 2024 are going to generate even more gift tax in 2025.
Once you are over the gift tax limit, it’s going to take a drop in asset values to get it back under the limit, so future additional contributions will also generate income that’s subject to gift tax until the asset values drop.
Sorry, that all sounds more like magical thinking than actual planning. All I’m saying is that if you planned it so that you are at/near the max of the gift tax exemption amount when you start the CRUT, you need to plan for paying gift tax in future years, especially if you are also planning on adding to the CRUT.
Yes, some years stock prices decrease, and some years there is really high inflation that will increase the limits - but overall, stock price increases far outstrip the rate of inflation, so once you get into gift tax territory, you’re not only likely to stay, but to push farther into it. And with the deficit issues, elimination of a tax that affects maybe 1% of the population is probably a non-starter. That’s evidenced by the fact that there have been proposals to do so for years, and they never get anywhere close to becoming law.
IRAs that have designated beneficiaries generally don’t have to go through probate, so they aren’t considered part of the probate estate. However, the value of the decedent’s IRA, even if it doesn’t go through probate, will count toward the value of their estate when calculating Federal estate taxes, unless the beneficiary is a 501(c)3 charity. (Note - this also applies to other types of retirement accounts, like 401(k)s, 403(b)s, etc.)
States that have estate or inheritance taxes generally start with Federal rules as a basis for what assets are included in the estate, but there may be some exceptions, so you should understand your state’s rules, as applicable.
It is a solution. But CRATs do not allow you to add anything to the trust and the income will not increase even if the value of the assets in the trust increase, or the gift tax limit increases. So you will be leaving more to the charity and less to your other beneficiaries.
Look, paying some gift tax and/or estate tax is definitely a first world problem. But going through so many hoops to avoid those taxes seems like robbing Peter to pay Paul since you pay pretty high fees to do so. But if you’d rather your money go to an asset manager instead of to the government, that’s your choice.
Thanks, AJ. Nvidia stock keeps going up. The problem keeps getting worse. A high class problem.
The estate tax liability makes those attorney fees look not so bad. Plus the beneficiaries are my heirs. They get a downpayment on their inheritance while young enough to enjoy it. Taxable but still nice. And charity gets nice donation for its trouble. I get a hefty tax deduction.
Until it doesn’t. Unless you actually sell and realize those capital gains, you have no guarantee that you will continue to have this issue. Plus, if you just leave the shares directly to your beneficiaries, instead of putting them into a trust, they will get a stepped up cost basis, which will save them on taxes. If you leave enough of your estate to charity your estate may be able to avoid most, if not all, of the estate tax. And even if your estate has to pay an estate tax, how will that compare to the initial and continuing fees that the trust will pay for all of the years it’s open?
It’s not just the attorney fees - it’s the ongoing fees to manage the trust, at 0.65% a year, plus any other fees and commissions on the assets they invest in, according to your previous posts.
Thanks, AJ. No capital gains tax is one of the pluses. Yes, stepped up basis would be better for heirs but they have to wait 20 years for the money. Gifting shares is also better (they get my cost base and pay only capital gains when they sell and not ordinary income tax). But I have to be around to make the gifts. Trust pays them whether I’m around or not. And minimum hassles for me.
Yes, expense ratio is a concern. Have requested info for the CRAT to see if the numbers are different. Kicking the tires as usual.
Looks to me like you think you will have 20 years to make gifts, if you think your relatives are going to have to wait for 20 years to get their inheritance.
Yep. I’m healthy and expect to be around for 20 years more. But when we speak of $MM estate tax, i’d rather give it to relatives. Trust is a good way to do that.
That $18k gift tax exemption makes it hard to give it away. Trust makes it easy.
Nvida went up by $140k today. Tough to give that away in $18k chunks.
Not so tough if you also give away the future appreciation with it. In other words, you give each person $18k OF STOCK each year, and your spouse gives each person $18k of stock each year. That way all the future appreciation of that stock has also been given.
