Friday June 5, 2026

Personal Planner

Income for Surviving Spouse

Elliot and Alexis were concerned about planning for the future. They had built a substantial estate of $1,600,000. When Elliot was 70, he rolled over his $600,000 qualified retirement plan into an IRA. Because he is now over age 73, Elliot is taking distributions.

Alexis also has an IRA. They jointly own their home, which is debt free, and have savings accounts, stocks and bonds.

If Elliot were to pass away first, Alexis would like to avoid paying additional tax. In addition to the IRA, Alexis already receives income from their investments.

Alexis said, "We seem to be paying a lot of income tax. When Elliot takes distributions from his IRA, that just pushes our income up higher and we pay more and more tax. Is there a way that I could reduce my income tax if Elliot passed away?"

A Solution for Alexis

Elliot could name Alexis as the designated beneficiary of his IRA. After Elliot passes away, Alexis may roll the IRA over. Alexis is age 73 and will soon be required to start distributions from the IRA. The added income would significantly increase Alexis’ taxes.

A solution that gives Alexis protection and good flexibility is for Elliot to transfer his IRA to a special trust when he passes away. Under the design of this trust, Alexis could receive a 5% income payout or could encourage the trustee to invest for growth.

If Alexis decides to let the income grow inside the trust, it will grow tax free until more income is desired. At a future date, Alexis may decide that the balance of the estate is not producing as much income as desired, and could encourage the trustee to start making the payments. By that time, it is quite possible that the $600,000 would have grown and the trust payouts could be significantly greater.

How to Create the Trust

This trust has a special name. It is called a net income plus makeup charitable remainder unitrust. Elliot and Alexis talked to their attorney, George. He prepared a unitrust document that Elliot and Alexis signed.

Under their state law, this trust document is valid even though it is not yet funded. Elliot then selected the trust as the designated beneficiary for his IRA and Alexis consented in writing to that designation.

When Elliot Passes Away

If Elliot passes away first, Alexis will own the family home outright and will inherit their other assets, except the IRA. Elliot's IRA will be transferred directly to the unitrust. Because it is a net plus makeup unitrust, the trustee may discuss her goals with Alexis and then invest the $600,000.

Alexis’ Options

Alexis may choose to allow the trust to grow for a period of time, if there is sufficient income from the IRA, Social Security and pension. However, if Alexis prefers to receive income from the $600,000 unitrust, then the trustee can invest to produce at least the 5% income and pay that amount to Alexis.

Alexis may decide to allow the trust to grow because there are modest expenses, no debt and sufficient income to enjoy annual traveling. At a future date Alexis could request the trustee change the investments from growth to income. For now, Alexis is comfortable with the trust investments in growth securities.

Saving Income Taxes

Because the growth of the trust is tax free and Alexis is not receiving substantial income from the trust, the income will be lower and there will be substantial tax savings. Alexis shared with their attorney, George, "I have more than enough and I could always spend a portion of my CDs if needed. It is a relief not to have the extra income and have to pay those high income taxes. Plus, I know that the trust is growing and I could receive a larger income in the future if needed."

Benefits for Family and Charity

If necessary in the future, Alexis will receive the income from the unitrust. However, Alexis may choose to allow the trust to grow and live on other income. When Alexis passes away, the trust principal plus growth will go to three favorite charities of Elliot and Alexis.

In addition, the children of Elliot and Alexis will also receive a substantial inheritance. The balance of the estate, including their home, CDs, stocks and bonds, will be divided between their two children.

Alexis is very pleased that income taxes will be reduced, and the estate total will be larger. Over time, the trust could grow quite substantially. The combination of security for Alexis, trust growth for charity and the benefits to family from the inheritance of the balance of the estate create a very good plan for Elliot and Alexis.