A New Look at Charitable Giving in the Age of SECURE
By Letha Sgritta McDowell, CELA CAP
On December 19, 2019 Congress passed the SECURE Act which drastically changed the tax scheme for beneficiaries of qualified retirement plans. Before SECURE, the beneficiary of a qualified retirement plan could take advantage of continued tax deferral. This was often known as the “Stretch IRA.” Post SECURE, with a few notable exceptions such as a surviving spouse or a person with a disability, qualified plans must be withdrawn within 10 years of the death of the beneficiary. This requirement to withdraw qualified funds early will drastically increase the income tax paid by beneficiaries due to accelerated withdrawal – placing many beneficiaries in higher income tax brackets. These changes are causing many with some chartable intent to take a new look at an old planning technique, Charitable Remainder Trusts (“CRTs”).
Charitable Remainder Trusts have been popular in high net worth tax planning for some time. They allow a taxpayer to transfer assets to an irrevocable trust that will provide a benefit to themselves or other beneficiaries for either a specified term of years or for the life of the beneficiaries. At the remainder of the period, any remaining assets transfer to the charity specified. The creator of the trust would receive an immediate charitable deduction for income tax purposes based on the present value of the remainder that the charity is expected to receive. It is an excellent planning technique for individuals who are charitably-minded to remove highly appreciated property from their estates. In light of the SECURE Act, this technique may be beneficial to individuals of moderate wealth to diffuse some of the tax consequences by stretching the payments of qualified funds over a longer periods and ultimately benefitting a charity.
CRTs take two separate forms, one provides an annuity amount, known as a Charitable Remainder Annuity Trust (“CRAT”); the other provides a unitrust amount, a Charitable Remainder Unitrust (“CRUT). A unitrust amount is a percentage of all of the assets in the trust, regardless of whether it is considered income or principal. With qualified retirement funds (IRA, 401(k), SEP, SIMPLE, etc) the owner would name the CRT as the beneficiary of the qualified plan. The CRT would then provide for either the annuity or unitrust amount to pay to the desired beneficiary. The CRT itself pays no income tax, and the beneficiary pays tax on the amount paid to him or her in the year.
For example, an individual could leave a $350,000 IRA to a Charitable Remainder Unitrust which provides for an annual payout of 12% of the trust for the benefit of their 55-year old child for her life. With annual growth and income of just 3%, the beneficiary will receive payouts of $539,311 over her life expectancy, and the charity will receive a gift of $70,068 at the death of the beneficiary. In addition, the beneficiary’s life expectancy is 25 years; therefore, the distributions are taken over a 25-year period rather than a 10-year period, ultimately allowing some continued tax deferral.
There are other options available to allow flexibility in the payout of CRTs which can make them even more attractive options; however, which options are relevant will depend on the age of the beneficiary, their income tax bracket, and the value of the IRA.
In addition, due to the somewhat complex nature of CRTs, many charitable organizations will act as Trustee of the CRT which eliminates the burden of administering the trust by the beneficiary. But, in the case of a sophisticated beneficiary, he/she may be named as the trustee of the trust, allowing him/her control over the investment structure of the assets in the trust. Ultimately, a CRT is a good option for an individual who has charitable intent. With no charitable intent, there is no foreseen benefit for a person to create a CRT. However, for those who have even a small desire to provide for charity and some qualified retirement funds, CRTs may provide excellent ways to provide a tax efficient benefit for those they care about while still benefitting a charity.
Ask Kit Kat: Dogs Saving Citrus
Hook Law Center: Kit Kat, how are dogs in Florida helping to save oranges and grapefruit from citrus disease?
Kit Kat: Well, once again an interesting tale about how animals have more talents than meet the eye at first glance! The citrus industry in Florida since 2005 has been dealing with various insect scourges that have significantly reduced the volume and strength of the industry. Currently, a particular threat is HLB (Huanglongbing), which prevents fruit from ripening. HLB lands on the citrus tree through a flying insect known as the psyllid. According to Tim R. Gottwald, a plant epidemiologist with the U.S. Dept. of Agriculture, “That psyllid is really a little flying hypodermic needle.”
In Perry, FL which is north of Jacksonville, one grower named Andy Jackson is taking a new approach to fighting HLB. He is utilizing specially-trained canines to sniff out HLB in its early stages, so the affected tree can be removed, and not infect large swaths of the grove. F1 K9 is a Florida company that trains dogs to detect explosives, drugs, and agricultural disease. Deploying trained dogs has an accuracy rate of 99%. Other methods like visual inspection and lab examination are much less effective and take longer to get results. The canines, fortunately, work incredibly fast. In 2-3 seconds, they can assess an individual tree. If they sit down, it indicates that the disease has been detected. A ribbon is tied to the tree, and within a few days, it will be removed.
The dogs at Jackson’s farm, on this particular day which the article was written about, are a springer spaniel, a German shepherd, A Belgian Malinois and a shepherd-Malinois mix. With one handler per dog, each dog walks a specific row in the grove. When they sniff the culprit, they sit and are rewarded with a chew toy or tennis ball. In about 3 hours, the 4 dogs have sniffed out the 25-acre grove. 25 diseased trees were discovered. Andy Jackson will definitely hire the quartet of dogs next year. (Duncan Strauss, “Dogs are helping save Florida’s citrus groves from a devastating disease,” The Washington Post, Jan.14, 2020)