June 6, 2014

Give It Twice Trust

Morrison,-Bob-colorBy Bob Morrison and Mary Huebbe
Marketing & Development Director Ridgecrest Village

Ridgecrest Village has a foundation that helps bring a better quality of life for our area seniors. Ridgecrest Foundation is a charitable organization that helps with Nursing Scholarships and supports Alzheimers and other benefits for seniors. One way we help is to give opportunities in gift
planning or philanthropy.

An excellent plan that many have selected is the “Give it Twice” trust. The trust pays income to children for a period of years. For example, a trust might pay 5 percent each year to children for 20 years. That trust may pay 100 percent of the initial principal, and then the trust principal is given to charity. In effect, the trust value has been given once to children and a second time to charity.

Most families have a goal to transfer a reasonable inheritance to children. This allows children to save, invest, pay down a mortgage on a home or help grandchildren go to college. However, parents realize that some children may not manage a lump sum prudently. For this reason, it is beneficial to transfer a portion of the estate as a principal distribution to children and the balance through a stream of income. The stream of income is often from a trust for a term of years.

For example, a trust might pay 5 percent income to children for a period of 10, 15 or 20 years. After the payments have been made for the selected term of years, the remainder may be distributed to charity. While income is frequently divided equally among then-living children, parents may choose other proportions. A larger percentage or share of income can also be specified.

A particularly attractive use of the “Give it Twice” trust is available if a surviving spouse has an IRA. In that case, the trust uses a special form called the Charitable Remainder Unitrust. The Internal Revenue Code states the trust will not pay any income tax on the IRA.

For example, an IRA could be transferred to a 5 percent charitable remainder trust. For a term of 20 years, the 5 percent payments would be transferred to children. At the end of that time, the IRA will be distributed to charity.

Assume that Betty has a $100,000 home and a $300,000 IRA. Betty Lee has four children. She would like to help her children and support a local charity.

While some of her children are good managers, she has one “creative” child who tends to spend funds as quickly as possible. Betty is very pleased that the trust will give her creative son 20 years of opportunity to learn to save and invest. Betty and her advisors decided to create a “Give it Twice” unitrust. When she passes, the $300,000 IRA will be distributed to the trustee, and the unitrust will make payments for 20 years to her children.

After the 20 years of payments to her children, the trust is distributed to a favorite charity. While the children are receiving new taxable income, the trust and the charity receive the value of the IRA and pay no income tax. This is a very helpful way for Betty to benefit children and charity.

If you have any question, or would like more information, please call (563) 388-3287.

Filed Under: Family, Finance