Late last week I received a call from a colleague of mine, a planned giving officer at a large hospital in the southwestern part of the United States who presented me with the outline of a mess of a testamentary planned gift he was trying to save. There are number of issues that need to be resolved and several I’m not sure how to fix but here’s the gist of the gift and if anyone has any ideas, let me know.
Husband and wife, both age 80. A number of years ago they decided they wanted to leave a significant gift to the hospital. There were significant IRA assets at the time, something in excess of $3 million. There were also significant assets in the estate for the surviving spouse but instead of leaving the IRA assets directly to the institution, they named a Charitable Remainder Annuity Trust (CRAT), with the spouse as the income beneficiary and the institution as the remainder beneficiary and trustee.
Here’s where it gets strange(r). The CRAT language calls for a fixed dollar payout ($145,000/yr), not a fixed percentage. Because of the market downturn and the fact that there have been ten years of Required Minimum Distributions, the balance of the IRA has declined dramatically to $1.3 million and the stated payout rate disqualifies the CRAT. Certainly this can be repaired with a reformation and the document apparently provides for that.
However, the glaring oversight is that the IRA to CRAT transfer is not a tax free rollover since the CRAT is not a qualified non-profit. Someone’s going to have to pay income tax, about $400,000 worth depending on the state. This will leave only $900,000 to fund the CRAT and will probably BE a payment of $45,000-60,000 annually, far from the originally intended amount.
Observations:
Too many variables. Too many mistakes.
What a mess. Somewhere between bad communication and malpractice. Better solutions, anyone?
In this brief article, we seek your knowledge and advice on a tricky estate mess. Read on and reply.