Testamentary Trusts

Sara was a successful businesswoman who had accumulated nearly $2M in her 401(k) over the years. She lives comfortably but not lavishly and does not consider herself wealthy. She also has long been involved with St. John's School. In fact, she served two terms on the alumni board. She has always intended to leave a “nice” gift to the School in her estate plans, but only considered an amount in her will, a figure limited by the investment assets in her portfolio. She has never thought about her retirement plan, far and away the largest item on her net worth statement, as an object for philanthropy, believing that she would need the assets in the plan for her own retirement and wanted the remainder of the plan assets to be available to her two children. 

Faced with the new knowledge that leaving a remainder to her children could result in significant erosion of the principle through taxes, she was stymied. But after learning about trusts, Sara was able to devise an estate plan that put the amount left in her retirement plan into a Charitable Remainder Trust (CRT) when she dies, with her children as the income beneficiaries, and the School as the ultimate trust remainder beneficiary. Thus, Sara has set up a plan that gives her children income for a set period of years, allows her to have complete control of the plan during her lifetime, and provides a significant legacy to the School in the end.

This plan can go into effect through a two-step process, one requiring legal help and one that is free and rapid: 

An estate planning attorney will need to draft a Charitable Remainder Trust (CRT) that will go into effect at the death of the donor. The trust document should name the income beneficiaries (usually the donor’s children), the number of years the children will receive the payments (any number of years up to a maximum of 20), and the ultimate charitable  beneficiary(ies). 

Once the trust is created, the donor can name the trust as the beneficiary of his/her retirement plan. This part is easy and free. A beneficiary designation form can be downloaded from the plan administrator’s website.