Stretch IRA Alternatives with a CRUT
A CRUT as a Stretch IRA Alternatives?
I considered using permanent life insurance vs Roth IRA as a Stretch IRA Replacement. Life insurance did not do as well as Roth conversions.
Now, let’s look at using Charitable Remainder Uni-Trusts (CRUTs) to create a stretch alterative. We can compare the CRUT to an actual stretch IRA and a 10-year IRA distribution.
What is a CRT? A CRUT?
Charitable Remainder Trusts can be Annuities (CRAT) or Uni-trusts (CRUT). Annuity trusts pay out a fixed amount of money every period, and thus are infrequently used.
Charitable Remainder Uni-Trusts, on the other hand, pay out a fixed percentage of the trust every year. Each year the value of the trust is recalculated, and the payment adjusted.
Remember, they are Charitable Remainder trusts, so promise at least 10% to the charity of your choice. If you want the charity to be your own DAF (donor advised fund), that is fine. (The Grandkids can give the money away!)
The payment rate is actuarially determined based upon beneficiaries age, interest rates, and IRS tables. Usually, 5-8% is taken out each year, and at the end of the term—usually 20 years—at least 10% remains for charity.
What Goes in a Charitable Remainder Trust?
Many times, appreciated property (such as real property or stocks with a low basis) are donated. Since they donated to charity, you get the full amount deposited into trust, which can then be sold without capital gains. In addition, you also get a current tax write off on the present value of the future charitable donation.
In this case, we donate an Always Taxable account (the IRA) into a CRUT. No tax is due and the full amount transfers over to the trust. The payments to the beneficiaries, however, retain their character (Always Taxable) and are always taxable.
Now that we know what a CRUT is, let’s see what happens to an Inherited IRA depending on the heir’s income.
What if You Leave Your $2M IRA to an Heir with No Income?
If the heir has no income, the inheritance fills the standard deduction. Next, fill the 10%, 12%, 22%, 24%, 32% 35%, and 37% tax brackets as the income increases.
Let’s look at the effective tax rate, the actual percentage you pay in taxes. This is opposed to the marginal tax rate, which is the percentage of tax you pay on your last dollar earned.
Estimated Effective Tax Rate
Above, we can see there is federal (dark blue) and state (light blue) tax. The 10-year IRA distribution is on the top, and CRUT on the bottom.
This graph represents estimated effective tax rate in the absence of any other income.
The effective tax rate for the 10-year IRA distribution starts above 30% and then drops after 10 years. After 10 years, taxes are only paid on the earnings of the $2M IRA which is now in a brokerage account.
In the Charitable Remainder Trust used as a stretch IRA alternative, taxes start out about 16% and stay at that rate over time. The income from the CRUT is fully taxable over the entire 20 years. Taxes will slowly increase over time as interest from bonds is fully taxable. Dividends, however, are taxed at 0% as they stay in the 12/15% tax bracket.
Also note for both graphs there is a bump at year 6. This reflects the end of the Tax Cut and Jobs Act in 2026 and an increase to the “old” tax rates.
Let’s look at where this income fits into the tax brackets, or the marginal tax rate.
Adjusted Taxable Income and Tax Brackets
Above, you can see the actual income for the 10-year distribution (top) and CRUT (bottom).
For the 10-year distributions, taxes say in the 22% bracket then drop down below the 12/15% tax bracket after 10 years. The CRUT, again, is fully taxable and stays in the 22/25% tax bracket over the twenty years.
These graphs are fun to look at with increased income, so we will do so below. First, let’s look at the breakdown of key tax components.
Key Tax Components of Stretch IRA Alternatives
On top in orange, the 10-year IRA distribution. The income from investments is shown in blue. Note how the slope of this line drops off when the IRA income goes away, as the tax rate drops.
The bottom graph shows the key tax components of the Charitable Remainder Trust. Blue is income from the taxable annuity. The green is the investment income which slowly increases over time with increasing slope as dividends and interest increase.
So, let’s get to the bottom-line number. Which type of account has the most money after twenty years?
The Best Stretch IRA Alternative: CRUTs
The “real” stretch has $2.27M more after 20 years than 10-year IRA distribution. Yup. And congress is taking the “real” stretch away from us. Ouch.
Above, see the portfolio value for the “real” stretch IRA (top in green), the 10-year IRA distribution (top in dark green), and the Charitable Remainder Trust (bottom graph). Again, the real stretch has $2.27M in value after 20 years! We will look at the numerical values below.
For the CRUT, there is a $2M “drop” the first year when the money is annuitized. CRUTs are irrevocable, so once the assets are placed in trust, they are gone.
Before we get to the final numerical portfolio values for different incomes, let’s look at incomes effect on your tax bracket.
Tax Brackets for Different Income Levels with the Charitable Remainder Trust
The interaction of income and CRUT is demonstrated above. On the top left, $50,000 income and the fully taxable benefits of the CRUT stays right around the 22% bracket through the 20 years.
Next, top right is $100,000 income, which remains in the 22% tax bracket throughout.
Bottom left is $200,000 income, which crosses above the 24% bracket when the Tax Cut and Jobs Act expires in 2026.
Finally, on the bottom right, $400,000 yearly income remains in the 35% tax bracket.
Summary: CRUT as a Stretch IRA Alternative
The Stretch IRA will be missed!
Employees work hard, defer massive amounts of money, but now our favorite Uncle wants his due: Taxes must need paid.
A Charitable Remainder Trust does not decrease tax liability compared to a 10-year IRA distribution.
CRUTs, however, are available to force a pseudo-stretch on your heirs if you are worried they may spend money too quickly despite adverse tax consequences.
CRUTs can be donated to DAFs. IF you have a high income heir, consider a CRUT for their lifetime with the remainder going into a DAF for the grandkids to manage.