Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

human beneficiaries (such as the donor’s spouse or children) (referred to in this section as “the human beneficiary,” though there might be more than one) either for life or for a term of not more than 20 years. At the end of the life (or term) interest, the remaining trust assets are paid to charity. A CRT must meet rigid requirements set forth in § 664 and its related regulations: The annual payout to the human beneficiary is specified in the trust instrument and must be either a fixed dollar amount, in which case the trust is a “charitable remainder annuity trust” or CRAT, or a fixed percentage of the annually-determined value of the trust, in which case the trust is a “charitable remainder unitrust” or CRUT. The annual payout rate of a CRUT must be at least five percent (but not more than 50%). A CRUT is more flexible than a CRAT because it can provide that the annual payout to the human beneficiary is the unitrust percentage or the net income of the trust if less, and can even provide for “makeup” distributions to the noncharitable beneficiary if in later years the trust’s income exceeds the unitrust percentage. However, neither type of CRT can permit the human beneficiary to receive anything other than the unitrust or annuity payout amount. The attraction of leaving retirement plan death benefits to a CRT is that the benefits are paid to the CRT with no income tax. Thus, the client’s human beneficiary can receive a life income from reinvestment of the entire amount of the retirement benefit. In contrast, if the individual inherited the benefits as named beneficiary under the plan, he or she would have to pay income taxes on the benefits as those were distributed, meaning that (once distribution of the benefits is complete) the amount left over for the human beneficiary to invest is substantially reduced. Thus the human beneficiary can expect a larger annual income from the CRT than he or she would receive by investing the after-tax value of any retirement benefits distributed to him or her directly. Another attraction is that the decedent’s estate is entitled to an estate tax charitable deduction for the value of the charitable remainder gift. This value is determined using IRS- prescribed actuarial tables and interest rates, and must be at least 10 percent of the date-of-death value of the trust. § 664(d)(1)(D) ; § 7520 . This is not to suggest that the client’s human beneficiaries will receive more money as life beneficiaries of a CRT than they would receive if they were named directly as beneficiaries of the plan. Normally the opposite is true, because an individual named directly as beneficiary of a retirement plan receives the entire benefit, not just the income from the benefit. The income beneficiary of a CRT receives only the income from the reinvested plan proceeds; the proceeds themselves (the principal of the CRT) eventually go to the charity. Also, the economic advantage of deferral of distributions over the life expectancy of the beneficiary, if the life expectancy payout method is available, reduces the negative effects of the fact that the distributions are taxable income to the beneficiary; see ¶ 1.1.03 . On the other hand, the payout from a CRT may be more attractive than naming the individual beneficiaries directly as beneficiaries of the retirement plan if long-term deferral is not available—for example, if the proposal (seen in President Obama’s recent Budget Proposals and elsewhere) to require a 5-year payout for almost all retirement plan death benefits becomes law— especially when the estate tax benefits of the charitable deduction are taken into account; see ¶ 7.5.06 (A), (D). See also ¶ 7.7.04 regarding gifts of NUA stock to a CRT.

Income tax rules for CRTs; IRD deduction