By Anthony Marrone
Syracuse native Anthony A. Marrone II is founder and CEO of The Marrone Law Firm, P.C. He focuses his practice in the areas of New York elder law, Medicaid, trust and estates, guardianships, and special needs planning. Through his trusts and estates practice, Anthony helps families protect, preserve and efficiently transfer wealth. He uses the latest tax-savings strategies to avoid or minimize estate, gift and income taxes. In the article below, Anthony discusses the charitable remainder trust as a useful and impactful alternative to the Stretch IRA. Thanks, Anthony!
Congress has tried to eliminate the Stretch IRA for years and now they’ve finally done it. The Stretch IRA allowed a non-spouse beneficiary of an IRA to withdraw from the IRA over the beneficiary’s life expectancy, essentially stretching the benefit of the IRA into the next generation. The Stretch IRA was particularly useful if your clients wanted to leave their IRA benefits in trust for their heirs, to be professionally managed for the next generation.
In place of the Stretch IRA, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which went into effect on January 1, 2020, now requires all non-spouse beneficiaries to withdraw the entire balance from the inherited IRA within 10 years of the owner’s death. Any trust planning or attempts to stretch those benefits out over the life expectancy of the beneficiary are gone with the passing of the SECURE Act. Or are they?
Your clients can still provide security for their heirs, make their IRA last for years after they do, solve several estate planning problems, and benefit a charity. All they have to do is join the growing trend of naming a charitable trust as beneficiary of their traditional IRA. By the way, this solution is nothing new and has been around since the Tax Reform Act of 1969; but now that the Stretch IRA is gone, it has become the only viable option.
LET’S LOOK AT A CASE STUDY. John Smith is a widower in his 80s who has a $1 million traditional IRA and several adult children. The children are in their 50s and 60s. John makes the Community Foundation beneficiary of his IRA and trustee of three charitable remainder trusts (CRTs). After John dies, the CRTs are created and the CRTs receive the IRA funds. Then, each year, regular payments will be made to his children. However, unlike the inherited IRA distribution rules, the payments from the CRT can last for the beneficiary’s lifetime or for a term up to 20 years, i.e., longer than the 10-year mandatory payout under the SECURE Act. Also, the assets in the CRT are protected from creditors, which may not be the case for inherited retirement accounts. After the children pass away, the remainder in the trusts will go to the Community Foundation for the charitable purposes designated by John when he created the trusts.
From a tax perspective, the trust isn’t taxed on either the distribution from the IRA or income and gains it earns. The children likely will owe taxes on distributions from the charitable remainder trust. The upside is that the charitable remainder trust can last much longer than the 10-year payout provisions contained in the SECURE Act. What this means is that for individuals wanting to extend the payout period, the charitable remainder trust becomes a practical vehicle to obtain all the benefits of the Stretch IRA and the additional incentive of benefiting a charity after the lifetime of their children.
A FEW POINTS TO CONSIDER:
- The approach discussed is most applicable for a single person, or as a contingent beneficiary for a married person. A surviving spouse still has the ability to inherit the decedent’s retirement accounts and use them over the rest of their life.
- Heirs will only receive an income stream and not a lump sum. If a lump sum payment to heirs is desired, a portion of the retirement account could be left directly to them.
- The charitable benefit should be emphasized with the family. Not only can this choice provide about the same or more benefit to the heirs assuming average life expectancies, but it should also provide a substantial amount to charity as well.
The Community Foundation can work with your clients to consider their situation. They will understand the number of beneficiaries and their ages, the possible payment amounts and duration, and the plan for their charitable fund. They will design a plan, help with implementation in the client’s financial and estate plans, administer the CRT and steward the legacy fund for generations.