Charitable Remainder Trust seems wrong for me...

[Jheroine]

Hi Folks,

My 2nd post and hoping for some advice, not sure if this is the right forum though. I've been talking with a financial planning firm that is contracted by the Feds and State of CA to provide free financial consultation to its employees. About 3 months ago, I attended one of their online seminars and they took my info from that and contacted me that they would be able to assist me in planning my retirement.

Initially, I was planning to retire end of 2025 but circumstances at work have changed that I feel it's best for me to retire by the end of this year instead. I just turned 55 last month so I will have a CalPers pension of approximately $57K a year (I haven't worked that long for the state so that's about 34%). Anyway, I'm single and have approx $1.75M in 401K, $500K in ROTH, $1M in post-tax investments. Last year I did a ROTH IRA conversion, but the financial planner is telling me not to do it anymore since I'm single and I don't have any heirs. He said the best strategy for me is to establish a Charitable Remainder Unitrust (CRUT). From what I've been reading and watching certain educational videos about it, this originally seemed like a good tax-saving strategy and also a good way for me to leave money to my charities when I pass. However, it seems the fees will eat away at a lot of what would be allocated to this trust. From one of the firms that help clients establish these trusts, a simple set up (I can probably put in $300K) would cost $3,500 to set up. Then they will charge an annual 0.5% or higher maintenance fee, administration fees, etc. I've done relatively well investing for myself all these years and I feel like all the costs and fees just to set up and run the trust will waste a lot of my earnings. I know it's a tax-saving strategy but it doesn't seem worth it to me.

Can anyone share your experience with these type of trusts or recommendations? I probably don't have enough to make this be worth it. I currently donate to my favorite charities and don't itemize it's still under the standard deductions amount. I may donate my RMBs once I qualify to charities to save on taxes if I don't need it in the future. Is ROTH IRA conversion a waste since I don't plan to leave any money to family (no kids)? I do have a personal living trust that instructs all my assets be distributed to specific charities once I do pass away.

Would appreciate any advise. Thank you.

 

[SecondCor521]

I looked into a CRUT a while back for my Dad. I decided against it for several reasons - fees and early mortality risk were two of the reasons I noted why we chose not to pursue.

You can donate up to $105K per year (starting at age 70.5) of your RMD as a QCD and it will be taxed at 0%. Also, anything left to charity from your estate will avoid all taxation (income, CG, and federal estate taxes). Your state could tax charitable bequests but I doubt that is even a thing.

I think the only way in which a CRUT would make sense is if you had living family members you wanted to leave money to *and* your charitable giving goals were larger than the $105K of QCDs each year could accomplish. Doesn't sound like it, but maybe.

Any "excess" Roth conversions would be a waste, because you could have just left the money in the traditional IRA and then given that to charity and nobody would have paid any taxes. You would only want to do Roth conversions for tax rate arbitrage during your lifetime - i.e., ones where you planned to both spend all of your Roth dollars while living *and* your tax rate now is lower than your tax rate later.

 

[harllee]

Sounds like the advisor is trying to sell your a CRUT, the advisor may make some money off of it. I agree with poster above--charitable gifts from an IRA is the way to go. After age 70.5 they are easy to do , no added fees and save taxes. I do them every year for all my charitable giving.

 

[OldShooter]

1. Ask the advisor if he is getting paid on this recommendation. And how much?

2. Like any major purchase, price shop it and talk to alternative suppliers. Start with a good trust and estates attorney.

 

[Errollyn]

I don't know if this is the best move in terms of taxes, but we went to an estate lawyer and he recommended we just set our beneficiaries in each account to whatever person or organization we want to get the money when we die. Then he did a beneficiary deed on our home so it's value goes to charities as well. We don't have heirs, and the lawyer was pretty adamant this was the best way to go in terms of cost and simplicity. Changing our beneficiaries was obviously free, and doing the beneficiary deed was $200 to the attorney.

 

[Jheroine]

Thanks everyone for your advice and input. I think the QCD starting at 70.5 is the way to go.

I do have other sources of taxable income that will throw me into a higher tax bracket so still on the fence about ROTH IRA conversions this year. Have a few more months to think about it I guess

 

[GrayHare]

Charitable trusts work best if you have highly appreciated assets to donate to them because then you avoid their capital gains tax. You can get similar tax savings with less complexity from a Donor Advised Fund, but with a CRUT you also get to withdraw a certain % annually. If you manage your own investments, you have enough experience to also manage a CRUT yourself and avoid third-party management fees. A CRUT is its own tax entity, so there are annual filings of Form 1041. Turbotax can handle the 1041 for you, but not the informational IRS Form 5227 that is also required annually. Your state might have additional filing requirements.

 

[pb4uski]

I'm struggling to understand the benefits of a CRUT vs keeping control of your money, donating as you want and making your favorite charities the beneficiaries of your financial accounts.

Sounds like the FA is recommending it because it is a nice way to gain control and earn fees and commissions on trading the portfolio.

 

[Jheroine]

I do have some stocks that have appreciated quite a bit so the FA is recommending the trust because he says I get an annual set percentage back from the money I move into the trust but it just feels like I'll be wasting $thousands every year paying all the fees that I could be giving to charity. I guess wealthier people don't mind losing some of the money to fees since they get a cut for themselves too. I would prefer to give more even if I don't get anything back. I'm meeting with him tomorrow so I'll say what else he says to try and convince me

 

[OldShooter]

Don't forget to ask him whether he gets paid for selling this product and how much.

If you want to stir the pot a little more and he is getting paid, ask him how reconciles this situation with his fiduciary responsibility to you.

 

[Jheroine]

Thanks, I will ask him these questions

 

[WhenIsItTime]

I set up a donor advised fund managed by one of the big firms for 50 basis points. Not thrilled about fee, but ability to do lump sums periodically to get a deduction and then future gains not taxed will more than offset the fee. Furthermore, I like having the portal where I can direct money and they write the check.

In regards to CRUT, you could always start giving some of the money away now to see how its used the hopefully the good it creates.

 

[BeanCounter62]

I have a CRT - created 25 years ago in my 30s - with highly appreciated stocks for a nice tax write off. And it covers a good percentage of my income needs each year.

CRT's are generally set up to generate ongoing income -- not usually much emphasis on the "Remainder" side that becomes the donation when you die. But this sounds like it was presented more about the donation than about the taxable income stream it creates. (Taxed based on types of income in the trust, often Long Term) Donor Advised Funds and QCD seem like they would be a more effective way to manage that -- unless you are looking for a different income stream from your assets.

I have not considered adding anything more to my CRT at this stage. I do not want to create more taxable income.

My CRT is Self-managed (officially with the aid of a Schwab Advisor, who is hands off ) and I do the taxes myself so there are no annual fees decreasing the balance.

 

[RetMD21]

I didn't realize that you could self manage a CRUT and save on fees! Some charities have gift annuity programs that would seem to accomplish the same thing, current tax deduction, income, and gift at death.

In OP's case it seems that the living trust is a sufficient solution.