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A Charitable Trust Can Shelter an IRA
Gideon Rothschild, JD, CPA
Many clients' greatest asset is an IRA, thanks to the nation's long-running
bull market and the trend in recent years toward rolling pension distributions
over into an IRA that is invested in stocks or stock mutual funds. But
without careful estate planning, non-spousal heirs may see only a small
fraction of an IRA.
When the holder of a sizable account dies, the account will be subject
not only to estate taxes of up to 55 percent but also to income taxes
on any distributions, since pretax money went into the IRA.
If both spouses are alive, the account holder's spouse is generally
the primary beneficiary, and the children are contingent beneficiaries.
When a client is a widow or widower who had previously named the now-deceased
spouse as beneficiary, one way to create a greater income stream for heirs
is to name a charitable remainder trust the beneficiary of the IRA.
Here is an example of the difference in such a case between naming a
noncharitable beneficiary for a $3 million IRA and naming a charitable
remainder trust: Assume the IRA goes to a widow's adult child who elects
to take a lump sum distribution: There will be Federal estate taxes of
$1,259,500, state estate taxes of $182,000 and Federal and state income
taxes of $701,325. That leaves $857,175, or 28 percent, available to invest.
In contrast, if the IRA goes to a charitable remainder trust, there will
be Federal estate taxes of $963,310 and state estate taxes of $127,840.
Based on Letter Ruling 9237020, June 12, 1992, no income taxes are due.
Assuming no unified credit is available, because of lifetime gifts, that
leaves $1,908,850, or more than $1 million more, available to invest.
The child, who is 41 years old in this example, will receive an income
stream of 7 percent, and upon his death, the remainder will go to the
In some cases, a third possibility, deferral, may provide a larger distribution
stream than would a charitable remainder trust, but that option is not
available when there is no surviving spouse and the participant has already
begun taking distributions. Each client's individual situation should
be studied carefully, as part of an overall estate plan, and, if necessary
revised after the client begins taking distributions.
Gideon Rothschild is a partner with the law firm of Moses and Singer,
LLP, New York City and co-chairman of the firm's estate planning and wealth
preservation group. He is a frequent speaker at National Tax Institute-Professional
Education Institute conferences and can be reached at firstname.lastname@example.org.
His firm's web site can be found at www.mosessinger.com
Mr. Rothschild will be lecturing at National Tax Institute-Professional
Education Institute 2000 conferences held in Santa Fe, Stowe, Vermont
and Grand Cayman Island. For more information on NTI-PEI resort conferences
please go to http://www.nti-inc.com/
or call 800-588-8491.