Many people in California save for retirement by funding an Individual Retirement Account, or IRA. If they pass away before depleting it, or if they choose to will the IRA to their child or someone else, the tax consequences may be significant, particularly with passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act two years ago. However, there is a strategy for minimizing an heir’s tax burden. The IRA can be used to fund a Charitable Remainder Trust (CRT), lowering the amount of taxes paid and allowing an heir to take distributions over a longer period of time.
Why a CRT may be better than an IRA
One of the disadvantages of the SECURE Act is that it only gives heirs 10 years to remove all funds from an IRA. In turn, this may increase the amount of tax paid on those distributions, depending on the tax bracket of the heir. Instead, it may be advantageous to move the funds from an IRA into a CRT.
A CRT stipulates that a percentage of the amount of the trust goes to a designated beneficiary, such as a person’s child or another relative. What remains after a designated term will be distributed to a chosen charity. A CRT also gives the recipient more time to take those distributions if that is stated in the terms of the trust.
Because CRTs are not subject to the same taxation as an IRA, the beneficiary of a CRT may wind up inheriting more money in the long run. Also, many CRT owners may like the idea of remaining assets benefiting a charity that is important to them.
Is a CRT always a good idea?
As good as a Charitable Remainder Trust may sound, it is not the right choice for everyone. One of the best ways to know the answer to that question is by consulting an estate planning attorney. A California attorney with experience in handling wills and trusts can walk an estate owner through available options and help them determine what may be best for them and their family.