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How to Convert an IRA to a Charitable Remainder Trust

How to Convert an IRA to a Charitable Remainder Trust

April 05, 2023

With the new passage of the SECURE Act that has made stretch IRAs a thing of the past, it may be time to consider how you can best manage your IRA wealth moving forward. Many people intend for their IRA to be a part of their estate planning as a generous gift to their beneficiaries in their eventual passing. However, it might pay to convert your IRA to a charitable remainder trust instead.

Estate planning can be tricky and Magellan is here to help. Here is what you need to know about why you should convert your IRA to a CRT and how to do it while minimizing the cost. 

Why Should You Convert Your IRA to a Charitable Remainder Trust? 

Many people have been steered toward IRAs by their financial advisors for years. While IRAs can be solid tools to save for future retirement, your heirs may be better served by a charitable remainder trust. This is particularly true if you plan to pass on the funds in your IRA to a beneficiary for their future financial well-being. 

Perhaps the most beneficial reason to consider converting your IRA into a CRT is to minimize the taxes that a beneficiary will pay on your IRA. It also fuels the growth of your money, allowing all your assets to grow for as long as the beneficiary is alive as opposed to the typical 10-year timeframe imposed by the SECURE Act. 

This timeframe is a new addition for an IRA implemented under the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This makes it less than ideal as a part of your estate planning. Meanwhile, charitable remainder trusts might be the more obvious solution so that wealth has an opportunity to continue growing and beneficiaries can retain the benefits for life. 

It also limits the taxes that your beneficiaries will pay, even if they have higher income tax rates. This lowers their effective tax rate and allows them to pocket more of the money that you worked hard to earn and set aside for their future. Plus, the beneficiaries have a greater degree of control over when distributions will begin. 

Last but not least, charitable remainder trusts are an excellent protection of your initial investment. If you fall into massive debt and have creditors knocking on your door, the assets in the trust remain protected. Nobody will be able to dip into those funds in order to cover debts, regardless of what else may happen. 

Which Type of CRT is Best? 

Much like there are a variety of retirement savings accounts, there are also different charitable remainder trusts to choose from. Most people can benefit from a charitable remainder unitrust (CRUT) over other types because it has many financial benefits, but you should consider how you intend to use this trust before deciding. 

The largest consideration for choosing a CRUT is the way that you can contribute to the trust. While some CRTs only allow you to contribute to the trust for the first year or a one-time initial investment, CRUTs allow you to continue making contributions. 

Better yet, your beneficiary can stretch withdrawals for life, allowing that money to earn compound interest and continue growing until the point where they need to access those funds. Your beneficiaries can receive lifetime payments from the trust until the remainder of this type of trust is bequeathed to charity (as long as it follows the 10 percent rule). 

How to Convert Your IRA to a Charitable Remainder Trust

If you feel that the financial benefits of a CRT are better suited to your goals for your lifetime or the lifetime of your beneficiaries, it might be time to rollover that IRA into a CRUT. Fortunately, this is much easier than it sounds. 

You can use your entire distribution in order to fund the CRT or you can start to contribute smaller amounts of money over a longer period of time. This is the benefit of a CRUT that does not dictate for how long you can contribute more money into your account.

Keep in mind that if you take out the funds from your IRA to fund a CRUT, this will be considered a source of taxable income. However, rolling it over into a CRUT allows you to take income tax deductions that can offset the overall cost of this move. 

Alternatively, you can name a CRT as the beneficiary of your IRA and name your heirs as the beneficiaries of your CRT. 

With the SECURE Act newly in place, this allows your beneficiaries to stretch out their payments for longer than 10 years. This could help them to achieve better tax benefits and keep them from being bumped into a higher tax bracket due to hefty withdrawals to deplete an IRA in the given timeframe of a single decade. Not to mention, you can name a charity that can benefit from your generosity. 

Estate Planning Consultation with Magellan

Handling your financial future can be confusing with all of the acronyms floating around that tell you how to best access your funds and give them to a beneficiary. If you currently have an IRA to give to an heir after your passing, you may want to consider rolling that over into a CRUT for the benefit of your beneficiary. 

Magellan can advise you on the paths you can to take to in efforts to make the most of your hard-earned money. We can help you both set up and manage your CRT long-term to get the most out of this vehicle when it comes to your financial future – and the benefit of your beneficiaries. Contact us today to learn more about how we can help you solidify your savings.

Tax services offered by Magellan Tax, LLC. Legal services offered by Magellan Legal, LLC. Tax and legal services offered separately from Cetera Advisor Networks LLC which does not provide tax or legal advice.