Page 48 - Investment Advisor September 2021

RETIREMENT PLANNING

10 years, there is no benefit of using the for a CRUT to be the best wealth transfer wealth transfer and tax deferral, the
CRUT, he said. Once the CRUT income vehicle for a client: The beneficiary can- main reason why some clients will
beneficiary dies, whatever is left goes to not be too young; the beneficiary can- want to use a CRUT is they may want
charity. Thus, there is an ever-present not be too old (or sick); the beneficiary to provide benefits for their heirs and
risk that the CRUT beneficiary will have will remain in a high tax bracket; and for charity.
a premature death, Levine explained. the beneficiary will have fairly strong
investment returns over time. 10. CRUTs are no “free ride.”
4. CRUTs don’t eliminate taxes. Careful planning needs to take place to
Naming a CRUT as an IRA beneficiary 9. The importance of the charitable determine if there is a benefit for a cli-
doesn’t eliminate taxes, it only defers intent component of a CRUT should ent in using a CRUT, Levine cautioned.
them, Levine noted. Therefore, if wealth be No. 1 to clients. A CRUT is generally not a great option
transfer is the primary concern, the Although many clients may want to for clients to maximize wealth transfer
projected wealth made possible by the consider a CRUT for maximizing to heirs.
CRUT’s extended tax deferral (com-
pared to the 10-year rule) must outweigh
the projected loss of the 10% remainder Social Security COLA Estimate
assets to the charity, he explained. But
the tax deferral can be beneficial. for 2022 Raised to 6.2%

5. The break-even point with he annual cost-of-living adjust- 2.4%), and new vehicle prices, which
CRUTs varies. Tment, or COLA, for Social Security increased 1.7% from previous month.
The break-even point with a CRUT is the benefits in 2022 — usually announced The Social Security Act stipulates
amount of time it would take for wealth in October — could be 6.2%, the highest that the formula for calculating COLAs
created through distributions from a since 1983, based on the July Consumer be based on changes in the Consumer
CRUT to “catch up” to wealth created Price Index, announced in mid-August, Price Index for Urban Wage Earners
from leaving the same amount of money according to Social Security and and Clerical Workers. Advocacy groups
to beneficiaries directly, Levine said. Medicare policy analyst Mary Johnson argue that Social Security COLAs should
of The Senior Citizens League, which be based on the CPI for Elderly, or CPI-
6. There are various other estimated the 2022 COLA would be 6.1% E, which better reflects senior expens-
downsides of using a CRUT. a month ago. es. Indeed, Congress is considering at
Additional complexities of using a CRUT The latest estimate, which is based on least one bill to make the change. And
include: loss of optionality and organiza- July consumer price index data of 5.4%, though the CPI-E calculation typically
tional and operational expenses. is especially significant as next year’s has shown higher COLAs in the past 11
COLA will be calculated on the aver- years, that is not always the case.
7. There are ways to potentially age of third quarter, or July, August and The CPI-E uses the same formu-
increase overall wealth using CRUTs. September, CPI data. las and prices as the CPI-W but puts
Strategies to (potentially) increase over- “Now with one third of the data need- more weight on expenditures typical
all wealth using CRUTs include: delay- ed to calculate the COLA already in, of those 62 and older. COLAs using this
ing distributions to the CRUT for as long it increasingly appears that the COLA index would be 0.2 percentage points
as possible via the 5-year rule; increas- for 2022 will be the highest paid since higher on average, the Social Security
ing risks associated with early death in 1983 when it was 7.4%,” Johnson said in Office of Chief Actuary reported in
exchange for the possibility of more over a release. 2011. From 1982 to 2011, CPI-E rose at
one’s lifetime; revisiting asset location The consumer price index for all an annual average rate of 3.1%, com-
and CRUTs will defer taxes but retain urban consumers in July rose 5.4% over pared with 2.9% for the methods that
the character of the deferred income. the past 12 months, and 0.5% from the are currently used.
previous month, the Labor Department
8. There must be a “near-perfect reported. (The CPI includes food and Jeff Berman can be reached at jberman@
storm” for a CRUT to be the best energy.) Key components of the increase alm.com. Ginger Szala is managing editor
wealth transfer vehicle. were energy prices, up 1.6% from the of Investment Advisor Group. She can be
All of these factors must come together previous month (as gasoline prices rose reached at [email protected].

46 INVESTMENT ADVISOR SEPTEMBER 2021 | ThinkAdvisor.com