Life and Death Planning for Retirement Benefits

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378 Life and Death Planning for Retirement Benefits
7.5.09 Usually unsuitable: Charitable lead trust
A charitable lead trust (CLT) is the mirror image of a charitable remainder trust: A
“unitrust” or “annuity” income stream is paid to a charity for a term of years, then the underlying
property passes to the donor’s individual beneficiaries at the end of the term
Unlike a CRT, however, the CLT is not exempt from income taxes. Thus a CLT named as
beneficiary must pay income tax on the benefits as they are distributed from the retirement plan.
Because of this, leaving traditional retirement benefits to a CLT appears generally to be a
disadvantageous way to fund such a trust.
Generally, the planning advantage of a CLT funded at death is that, in addition to satisfying
the donor’s charitable intentions, it may allow funds to pass to the donor’s descendants free of gift
or estate taxes. This phenomenon occurs if the investment performance of the trust “beats” the
IRS’s rate. When the initial bequest is made to the CLT, the IRS tables are used to
value the charity’s and family’s respective interests in the trust. The decedent’s estate then pays
estate tax on the value of the interest passing to the family. If the trust’s investments outperform
th rate, the amount by which the investments outperform th rate eventually passes
to the family beneficiaries. Since the IRS rates did not predict that this value would exist, the
excess value is never subjected to estate tax.
If the CLT is funded with traditional retirement benefits, however, the CLT will generally
start out at a disadvantage, since some of the principal that the IRS assumed the trust would have
has been used up paying income taxes. This makes it less likely that the trust will “beat” the IRS’s
rate, because in effect the trust starts out with a loss. The client may well end up paying
estate tax on more than the family beneficiaries eventually receive. The CLT thus appears
generally an unattractive choice as beneficiary of traditional retirement benefits, though there
could be some unique circumstances in which it would work.
Is there any advantage to naming a CLT as beneficiary of a “Roth” IRA, distributions from
which are generally income tax-free? Again, probably not. A CLT cannot qualify as a “see-through
trust” under the IRS’s minimum distribution trust rules, because it has a nonindividual beneficiary
(the charity that is the lead beneficiary). Thus, to comply with the minimum distribution rules, all
funds would have to be distributed out of the Roth IRA within five years after the participant’s
death (see E)). This disposition would waste the potential long-term deferred tax-free
payout that is allowed if the Roth IRA is payable to an individual beneficiary or a see-through
trust.
7.5.10 Unsuitable: Pooled income fund
With a pooled income fund , the donor makes his gift to a fund maintained
by the charitable organization that will ultimately receive the gift. The fund invests the gift
collectively with gifts from other donors, and pays back to the donor (or to another beneficiary
named by the donor) a share of the fund’s income corresponding to the relative value of the donor’s
gift. When the donor (and/or the beneficiary he nominated) dies, the share of the fund attributable
to that donor’s gift is removed from the fund and transferred to the charitable organization.
The pooled income fund has been called “a poor man’s charitable remainder trust,” because
it provides approximately the same benefits as a CRT (irrevocable gift of remainder interest to
charity generates an estate tax charitable deduction, while providing a life income to the donor’s
human beneficiaries), without the expense of creating and operating a stand-alone CRT. Unlike
CRTs, however, pooled income funds are not exempt from income tax. Reg.