Do IRS Mortality Tables Impact on CRTs?

A little-noticed, technical change in the way the IRS calculates trust distributions has created a lucrative — but fleeting — opportunity. By setting up a Charitable Remainder Trust before this window closes, you could earn $1.5 million more on the sale of a $5 million asset.

On April 27, the IRS proposed updated mortality expectations for the first time since 2000. The good news is that Americans are expected to live significantly longer — an extra 5 years or so for a 35-year old. The bad news is that, once these new numbers are finalized, the annual distribution percentage available for irrevocable trusts will drop. (The reason has to do with actuarial math, and we’ll cover it in a future post.)

IRS Mortality Tables

So why are we bringing this up? Because the updated mortality table — and the associated drop in payout percentages — has yet to take effect. Observers expect the rule to be finalized in the next six months, though. As a result, there is a rare arbitrage opportunity: Set up a Charitable Remainder Trust to reduce your capital gains taxes now and you can lock in the higher payout percentage for the rest of your life.

We know this is technical. You don’t really need to worry about the mechanics — the tl;dr is that you can withdraw more money from a trust established today than you will from one set up after the new rules take effect. But to help our readers get their heads around why that is, we’ll take a look at a quick example. The bottom line is that this should be an easy decision: Set up a Charitable Remainder Trust now if you think you might need it in the future, especially since Valur will get you set up at no cost and with no commitment.

We’ll assume for the rest of this article that you’re familiar with the basics of these trusts — whether it’s a Standard CRUT or a NIMCRUT, term or lifetime. If not, take your time, and we’re always happy to help jumpstart your learning with a quick phone call.

An example on IRS Mortality Tables

Lin is 35 and lives in San Diego. He started his e-commerce store 7 years ago and is planning to sell his business for $5m to take some well deserved time off and spend more time with his two young kids.

The numbers

• Cost basis: $0
• Sale value: $5,000,000
• Chosen trust: Lifetime NIMCRUT, which is expected to last for 51 years

Annual Payout Rate:

• Current Payout Rate: 6.018%
• Payout Rate with IRS Updates: 5.78%
• Expected Growth Rate: 10%/year, based on historical S&P returns

How much more can you withdraw under the current rules?

Lin expects to withdraw 5% of his trust assets every year (with larger withdrawals towards the end of his life) to support his family’s needs. Over the length of the trust — 51 years according to current actuarial estimates — Lin would expect to earn an additional $1.4 million with the current payout rates. (That’s $33.4 million currently, and $32 million if he gets set up after the IRS changes the rules.)

That extra $1.4 million is why Lin choose to set up his trust now, even though he doesn’t plan to sell his business until next year. (This is possible in part because Valur doesn’t charge anything until you put assets into your trust.)

Act now, but if you can’t, just act

Importantly, a Charitable Remainder Trust will remain an incredibly powerful tax planning tool for appreciated assets whether you get set up before or after the IRS rate changes. Even after the switch, the expected return on investment from CRUT planning will be an extra 100% or more — that’s double the lifetime returns.

Indeed, while the payout rate changes will impact distributions over the course of the trust, everything else about the trust will stay the same.

Immediate Charitable Income Tax Deduction. The charitable income tax deduction Lin (and you) will get won’t change in either scenario. Like all of our users who choose a Charitable Remainder Trust, Lin will get an immediate tax deduction to lower his income this year — for about 10% of the fair market value of the assets he puts into the trust, or about $500,000. Since Lin lives in a high-tax state, California, the tax savings are substantial: That $500,000 deduction translates into cash savings of about $258,000 on next year’s taxes.

No Taxes On Sale. The updated annual payout rates won’t impact the tax-exempt status of the Charitable Remainder Trust, so in both cases Lin would be able to defer the federal and state taxes on the $5 million sale of his business. That’s about $1,850,000 in taxes deferred while Lin reinvests the savings.

Available Withdrawals. With current rates, Lin could withdraw about $2 million in the first 5 years. Under the lower rate regime of the future, that number would be about $1.9 million. Not a huge difference in the first few years, and if Lin wants more cash, he has several options for creating liquidity.

Next Steps

While the IRS’s proposed changes may not seem huge, the benefits of acting now are substantial — this could amount to millions of dollars over your lifetime. The bottom line is that this should be an easy decision: Set up a Charitable Remainder Trust now if you think you might need it in the future, especially since Valur will get you set up at no cost and with no commitment.

See our next article on tax planning strategies for an IPO, schedule a time to chat with our team or get started setting up your trust at no cost and with no commitment.

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerburg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.