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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 charity.

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 grothschild@mosessinger.com. 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.

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