Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

all) retirement plans to pay out all benefits within five years after the participant’s death— with exceptions for surviving spouses, minor beneficiaries, disabled beneficiaries, and beneficiaries the same age as or older than the participant. Should such a drastic change become law, the CRT would become the only tax-advantaged way retirement benefits could be used to provide a life income to the participant’s adult nondisabled children.

Reasons NOT to leave benefits to a CRT

Though it is a great planning tool, there are limitations on leaving retirement benefits to a CRT. Beware of leaving too much money to a CRT with individual beneficiaries other than the surviving spouse (see “ A ”), or with individual beneficiaries who are “too young” (“ B ”), or for a nonconsenting surviving spouse (“ C ”). A. Do not overfund CRT with nonspouse beneficiary. When retirement benefits are left to a CRT, the entire value of the benefit is included in the decedent’s gross estate for estate tax purposes. The estate tax charitable deduction for a bequest to a CRT will not shelter the entire value from estate taxes. Rather, only the actuarial value of the charitable remainder is allowed as a charitable deduction. Accordingly, unless the surviving spouse is the sole human beneficiary of the CRT (in which case her interest is nontaxable because it qualifies for the marital deduction; § 2056(b)(8) ), the human beneficiary’s interest in the CRT will in effect be subject to estate tax, if (combined with the decedent’s other assets) the amount is large enough to attract estate tax. The question of who is going to pay that tax and with what funds needs to be settled as part of the estate plan. Leaving too much money to a CRT could cause a tax meltdown. Ted Example: Ted dies in 2015, leaving his $10 million IRA to a five percent CRUT for the life benefit of his 50-year-old son Todd. There are no other assets in the family. Ted’s gross estate is $10 million for federal estate tax purposes. From this amount, the estate is entitled to an estate tax charitable deduction for the value of the charitable remainder under the CRT. This deduction reduces the taxable estate to $7.2 million, still substantially in excess of the federal estate tax exemption amount ($5.43 million for deaths in 2015). There is no money to pay the estate taxes, except in the IRA. Paying the tax from the IRA will cause a cascade effect: The IRA distribution will be subject to income tax, so the IRA needs to distribute substantially more than the amount of the estate taxes just to get the estate tax paid…but using the IRA money for this purposes reduces the bequest to the CRT, which in turn reduces the charitable deduction, which increases the estate tax… B. CRT does not work if beneficiaries are too young . In order to be a qualifying charitable remainder trust, the value of the charitable remainder (as of the date of the gift to the trust, or, in the case of a CRT funded at death, as of the date of death) must be at least 10 percent of the total value of the trust. § 664(d)(1)(D) , (d)(2)(D) . If the CRT beneficiaries are “too young,” and have a life interest, the trust will not meet the 10 percent requirement and it will not qualify as a CRT.

Gerald Example: Gerald, age 75, dies leaving his $1 million IRA to a trust that is to pay a five percent “unitrust” payout to his two grandchildren, ages 14 and 16, for life, with remainder to