Oklahoma Conference of the United Methodist Church

Legacy Planning Using an IRA–CRUT



During your lifetime, an Individual Retirement Account (IRA) is an excellent asset. It grows tax free, the minimum withdrawals under the regulations are fairly modest, and it provides both retirement income and liquidity for the IRA owner.

However, for the children or other individual heirs of the IRA owner, the IRA is not nearly as desirable an asset.

Many other assets will be distributed to family or other heirs free of income, capital gains, or estate tax, but with the IRA frequently comes a very large income tax bill.

All distributions from the IRA to the individual heirs are taxable income. Worse yet, the IRA payouts, even if stretched over a long period, are added on to the recipient’s taxable income and could increase his or her tax bracket.

John and Mary raised a family of four children. Four years ago, when John passed away, all of his assets transferred to Mary. She received the house, the CDs, the securities, and John’s IRA.

Mary rolled over John’s IRA and added in her IRA, to total $600,000 in the IRA. She also has about $600,000 in other assets.

Mary desires to have her four children benefit equally, but faces a challenge common to parents.

Two of the children are very good money managers, one is a marginal money manager, and one is quite creative and a terrible money manager. If Mary transfers the assets equally to all four, the creative child will use those assets in new and wonderful ways in perhaps three weeks.

Mary thinks it more desirable in the circumstances to "diversify" the inheritance.

A way to provide for zero estate taxes, eliminate the income tax on the IRA, and diversify the inheritance is to use a Charitable Remainder Unitrust (CRUT). Upon Mary’s death, her stocks, bonds, home, and other assets are transferred outright to the children. However, the taxable assets (IRA) are transferred to a testamentary term of 20 years CRUT.

Her beneficiary designation is then changed to the trustee of the CRUT.

Fortunately, under the new Sec. 408 regulations, this does not change her minimum distribution requirement for the IRA.

When Mary passes away, her diversification goal for the inheritance is achieved.

The children receive approximately $576,000, after costs of $24,000 outright. The remaining $600,000 IRA asset is transferred to a 5% CRUT for a term of 20 years. Since the CRUT is exempt, there is no tax paid on the ordinary income.

The full $600,000 from the IRA is then invested and earns new income for the children for the term of 20 years. While this is taxable, over $725,000 is paid to the children during the term of years.

At the end of the term, the IRA plus growth provides a very nice endowment for the benefit of John and Mary’s church.

If you would like a personalized illustration of the IRA CRUT, please contact David Battles, CPA, at 800-259-6863 or dbattles@okumf.org. There is no obligation and all inquiries are confidential.


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