Joe and Shelly were both retired and in their 60s when Joe became ill. While they both had worked and saved throughout their careers, it was Joe who primarily handled their investments while Shelly focused more on the day-to-day finances of running the house. They had two grown children and were taking care of their grandson, who was enrolled in college. The mother of their grandson, Joe’s daughter from a previous relationship, is a recovering addict and is trying to put her life back together. Their other daughter is married and lives out of state. In talking to Joe and Shelly, one of their biggest financial concerns was making sure that the money they’ve saved could be used so that Shelly would be able to continue the lifestyle she’d become accustomed to. Their other longer-term financial concern was leaving their savings to their two children and grandson. Most of their savings were in IRA and non-IRA investment accounts. They weren’t necessarily concerned with leaving a large sum to their one daughter. However, they felt that if they left a large sum of money to their daughter who’s struggled with addiction, it could cause her to relapse. And although they felt their college-aged grandson has always been quite responsible for his age, he nonetheless was still very young. In short, they feared that when it came time to pass their savings onto their beneficiaries, one could handle it while the other two may not make good decisions.
Through our financial planning process, we were able to determine how to properly invest the money not only for the income that Shelly would need in Joe’s absence but also for growth. Determining the best way to pass the money on to the beneficiaries following Shelly’s passing was a bit trickier.
Between Joe and Shelly, they had about $1,500,000 saved in Traditional IRAs and retirement plans in addition to other investments. Per IRS rules, when non-spouse beneficiaries inherit these accounts, they must draw them down to $0 by December 31st of the 10th year following the owner’s passing. For the three beneficiaries, this means each would receive $500,000. This concerned Joe and Shelly. Not only would their beneficiaries lose a significant amount of this money to taxes, they worried about how their daughter and grandson would handle the temptations that come with new found wealth.
By working with an estate planning attorney, we determined that it would be prudent for Joe and Shelly to establish two trusts. One trust would receive the non-IRA assets while the other, a Charitable Remainder Unit Trust or CRUT for short, would receive the IRA assets.
By making the CRUT the beneficiary of the IRA assets, the $500,000 each of the beneficiaries would receive will be paid out to them in increments over their lifetimes, not in a lump sum or even over the 10-year period. In essence, by using a CRUT to receive and distribute the IRA money, we’ve recreated the Stretch option that was eliminated when Congress passed the SECURE Act in late 2019. The trust we established for the non-IRA assets will do the same.
In summary, when Joe passed, we were able to help Shelly maintain the lifestyle she wanted by positioning their savings in a manner to not only address the income she needed but also provide for liquidity and growth. Additionally, we were able to develop a plan that allows for the money to pass to their beneficiaries in a way that minimizes taxes, protects it from creditors and predators as well as encourages good spending habits.
This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.