Charitable Remainder Trusts as IRA Beneficiaries

Jonathan Raymon, J.D., CTFA, CAP
Charitable Solutions Strategist

Kate Biagi-Rickert, MSW, CAP®
Charitable Solutions Officer

How CRTs Help Stretch and Maximize IRA Distribution Benefits

Naming a charitable remainder trust as the beneficiary of your IRA can maximize your total distribution potential while sustaining your philanthropic legacy.

A Better Way To Pass On an IRA

A CRT is a trust that makes distributions to beneficiaries for either their lifeti me or a term of up to 20 years, with the remaining balance going to charity. A CRT funded by your IRA, often referred to as a testamentary charitable remainder trust, allows the opportunity to stretch the years of distributions to non-spousal beneficiaries, which can increase the total amount distributed while also supporting your charitable legacy.

The IRS mandates that most individual, non-spousal IRA beneficiaries deplete an inherited IRA account within 10 years. These distributions often happen during the beneficiaries’ highest-earning (and thus highest-taxed) years. In addition, the beneficiary might choose to take a single lump-sum payout, which no longer protects the assets from divorce, litigation or a spendthrift. These effects might run contrary to the goal of many parents of passing on their own retirement accounts to bolster their children’s retirement savings.

By naming a CRT as the beneficiary of the IRA, distributions to named loved ones, including children and grandchildren, can be delayed (if desired) and last longer than 10 years, allowing the protected assets to grow tax-deferred with maximum payout potential. At the end of the trust’s term, the remaining balance is distributed to a charitable beneficiary, which may include public charities, a family donor-advised fund or even a family foundation, ensuring the donor’s lasting philanthropic legacy and potentially motivating future generations to have a philanthropic impact.

For individuals who might be subject to estate tax – a growing concern due to the potential sunset of the oversized estate exemption amounts at the end of 2025 – the present value of the share of the trust that is expected to go to charity in the future is deducted from the taxable estate. Plus, since a testamentary charitable remainder trust is funded after the donor’s lifetime, the donor maintains flexibility to modify their IRA beneficiary and CRT specifics should circumstances change during their lifetime.

How Baird Trust Can Help

There are several considerations that should go into establishing a charitable remainder trust, such as creating the trust with an experienced estate planning attorney, paying legal fees at creation and paying administration fees to maintain the trust during its lifetime. A CRT is its own legal entity that requires an annual filing of a tax return as well as responsible fiscal oversight, investment management and administration of distributions to named beneficiaries. Baird Trust has 40 years of experience as a responsible fiduciary of all different types of trusts, including charitable remainder trusts.

Estate planning professionals can help donors incorporate testamentary charitable remainder trusts into their broader estate plan. An advisor will help outline the trust terms that work best for the donor’s objectives, including beneficiaries and contingencies, a fixed or variable payment, the income distribution schedule and other details.

Frequently, the beneficiary of a testamentary charitable remainder trust is the adult child of the original IRA or 401(k) owner, and the trust is intended to last the child’s entire life, including their eventual retirement. The CRT might also be set up to last for dual lives, such as the adult child and the child’s spouse. It can even be established for a grandchild, although in these cases the term may be limited to a fixed number of years to ensure the charitable interest is at least 10% of the original funding amount, per requirement.

Better Tax Deferral

This isn’t the only benefit to charitable remainder trusts. Just like traditional IRAs or 401(k)s, CRTs allow any income and appreciation to grow tax-deferred until distributions are made to the beneficiary. However, unlike those retirement accounts, CRT distributions retain the same character of the growth in the account – meaning those distributions may be treated as capital gains or tax-exempt interest rather than ordinary income. The CRT itself is taxexempt, and the beneficiaries are only taxed to the extent that they receive distributions in a given year.

Charitable Remainder Trusts in Action

Although specifics for any CRT are dependent upon future interest rates and the variability of future market returns, it might be helpful to view a hypothetical scenario where a CRT can be beneficial. Consider an 85-year-old with a retirement account valued at $1 million. If this individual were to die today, leaving the retirement account to his successful 55-year-old daughter, you can compare the distributions made directly from a retirement account versus those through a CRT:

*The daughter’s presumed life expectancy
In both scenarios, we assumed average market returns of 7% and combined state and federal tax rates for the daughter of 35% during the first decade of distributions and 25% at age 65 and beyond (reflecting a lower tax bracket, but also the eventual return of distributions in something other than ordinary income).

By using a CRT to make distributions to the daughter, she’s able to net about 25% more in total distributions. Even more impressive, the remaining value of the CRT would be $1.5 million for future family charitable giving.

A charitable remainder trust delivers unique dual benefits of providing financial security for loved ones while also supporting the charitable organizations and causes you care about most. Using a traditional retirement account to fund a CRT after your lifetime offers the potential for several enhanced benefits to beneficiaries.

Baird Trust Company (“Baird Trust”), a Kentucky state chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker-dealer and investment advisor), and other operating businesses owned by BFC. Neither Baird nor Baird Trust provide individualized tax, accounting or legal advice. Please consult your accountant or attorney for personal tax, accounting or legal advice.