Talking T&E for Advisors: Using a CRUT for Inherited IRAs

Welcome to Talking T&E for Advisors, where Trusts & Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors.

In this video, they discuss when to put an inherited IRA into a CRUT.

Read the full raw transcript below:

Susan Lipp: Hi, I’m Susan Lipp, editor-in-chief of Trusts & Estates, and I’m speaking with Jamie Hopkins, CEO of Bryn Mawr Trust Advisors and Chief Wealth Officer at Bryn Mawr Trust. Today, we’ll discuss the benefits of making a lifetime stretch of an inherited individual retirement account through a charitable remainder unit trust. This is an issue because the 2019 SECURE Act significantly limited the availability of stretch treatment with a few exceptions. So let’s let’s start from the beginning uh with the SECURE Act.

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Jamie, why have the SECURE Act and SECURE 2.0 made inherited IRA planning more challenging?

Jamie Hopkins: Yeah, and I think hopefully most advisers are are up to speed on this at this point, but you know, pre-SECURE Act, we really had this ability to stretch IRA distributions, retirement account distributions over the life uh often of the beneficiary receiving it. There were caveats to that, but fast forward uh really we’ve condensed that time frame down. Outside of spouses, we really now have 10 years to distribute these accounts. And that’s a very different world. We might have gone from 30 plus years of tax deferral to you know a 5 to 10 year period of tax deferral and so the planning around this is more important where pre-SECURE Act the notion was you leave it to them they stretch it and you don’t do a whole lot else. Since then we have to look at trusts and charities and who’s the right beneficiaries and all different other types of setups which leads us into this article and conversation.

Susan Lipp: And can you describe the basics of a CRUT.

Jamie Hopkins: Yeah. So, uh, CRUTs and CRATs and GRUTs and GRATs, the fun names that we have in our legal world. But, uh, you know, when you say the whole thing out loud, it makes a little bit more sense, which is a charitable remainder unit trust. And so, if you break that down, it’s a charity that gets the remainder of the trust. And that is in essence what it is is it’s a structure in where beneficiary receives distributions from a trust. Your assets go in there and because it’s a a charitable remainder trust, you get this tax deferral inside of the trust until things are actually distributed out. So, the beneficiary, often your kid or spouse or somebody else you care about gets annual distributions from the trust. They’re taxed on that, but the charity receives the remainder amount in that vehicle at the end. And because it’s a charity, they don’t pay taxes on it. Now one other thing about the CRUTs versus CRATs which is uh both of them can be valuable but the main difference is a CRAT has a fixed payment amount. So think $50,000 a year versus a CRUT will be variable payments but a fixed percentage. So you could say 5% which of a million dollar is 50,000 but if the account goes down for a couple years the payout will go down. If it goes up over time, the payout could increase, but because it’s a percent of the assets, it’s it will really never run all the way to zero. So, there’ll be some remainder amount left for the charity,

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Susan Lipp: Right? So, how can the CRUT help restore a tax deferral for inherited IRA assets?

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Jamie Hopkins: Yeah. So there’s a lot of assumptions that have to go into this, but the first notion is if the client does have some charitable inclination. Now they need to have that uh if they don’t if they’re not charitably inclined, they don’t have a charity they want to receive assets, uh charitable giving doesn’t make sense. You’ll never get 100% of what you give kind of back in tax savings or anything else. So you have to have some type of charitable aspect. Now, what happens here is as you start to model out CRUTs and CRATs, what you’ll see is that continued tax deferral that you get by putting it in and being able to stretch out the distributions to your beneficiaries longer than 10 years. You can pick a 30-year time horizon. You could pick the remainder of their life. And if your kids are 25 when they inherit it, we could be talking about 60 years of tax deferral distributions. That really does help the accounts grow over time potentially or just minimize that tax drag early on from high distributions pushing a beneficiary into a high tax bracket. And then in addition, we get that tax-free uh transfer of the remainder assets to the charity. So let’s just say that’s half of the trust at the end of the day. Well, 50% is not having any type of tax drag on it and the charity gets that full 50% of the rema you know of the assets of the trust. So those two pieces actually have some favorability towards CRUTs. Pre-SECURE Act not a whole lot of benefit because you could stretch it. Post-SECURE Act a little bit of a benefit.

Susan Lipp: So why or when can a CRUT outperform a traditional inherited IRA?

Jamie Hopkins: Absolutely. And CRUTs can what we say outperform. And what that really means in the context of this conversation is we can leave more after tax dollars to our beneficiaries and the charity combined than if we leave an IRA directly to a individual beneficiary. That is really the whole crux of the argument when structured correctly because we get going back to my further example say half of the amount pays no taxes on it. So that could be substantial savings right there. Typically alone that doesn’t put us in a better spot. We usually do need to have a long runway of the beneficiary where they are going to be alive over 20 years typically that those distributions are going to last for a while and we typically need to see some positive uh assumptions around the investment returns inside of the CRUT. If you kind of assume a flat investment horizon and a short-term uh you know beneficiary lifespan of 10 to 15 years, it’s unlikely that a CRUT really provides any benefit from a pure after tax standpoint. Uh but CRUTs used to not be used in this context at all. It was used because we had a charitable desire. And so you do have to go back to that. If you have a charitable desire and you want to split this amount up between an individual and the uh charity, this could be the most tax-efficient way to use a retirement account and allow us to give more after tax dollars than in any other situation with an IRA or 401k.

Susan Lipp: So what factors should your clients be considering before using a CRUT as part of their IRA estate plan?

Jamie Hopkins: Yeah. So, we’ll go back to a couple things that we’ve said already. This one works as a good wrap-up for us here today. So, I always start with do they have charitable intent? We have to care about a charity. If we don’t care about a charity, CRUTs and CRATs and charitable giving techniques should just be removed from the conversation. So, start with that. Do we have a meaningful charity? Second part about the charity is are they likely to be around in 20 or 30 years? We might have charities that we care about tremendously, but they could be short-term things that if you’re tackling a particular disease or a particular area of the country, it might not be needed in 30 years. So, you do want to think about that because this is a long-term gift. It’s not something the charity is going to see immediately during your life or hopefully even the next 10 to 20 years. So, long-term planning around the charity. The next part is, do you have an income beneficiary? Your kids or grandkids that would benefit from some stretched out distribution of your inherited IRA or 401k accounts. If you look at your kids and you think they’re going to need the money next year after you die, this is not a great vehicle. They won’t have liquidity. They won’t have access to it. Uh it will be stretched out. Now, if you’re worried about their spending, their habits, or there’s, you know, they’re pretty young and it would be good for them to have income over a long period of time, again, this should come back into the conversation. But without those two main factors, it’s not a great vehicle. So, we have to have a a a beneficiary that needs stretched income, and we need to have a charity that we care about that we think will be around in the future. With those two factors together, we can then look at does this work as a technique to enhance our giving and enhance the income to the people that we love.

Susan Lipp: Okay. Well, thank you so much for breaking all that down. Um, it does sound like a great option for charit charitably inclined clients to consider.