Advisors are Examining Charitable Remainder Trusts for IRAs
Charitable Remainder Trusts are not new to estate planning. For people with charitable intent they have been used for quite some time when dealing with highly appreciated assets. Now, however, they are emerging as a potential solution to the accelerated income tax imposed by the SECURE Act. We previously discussed how the SECURE Act almost completely eliminates the Stretch IRA provisions. This has left tax and financial advisors searching for a solution to the increased tax implications for their client’s IRAs. Many are pointing to the Charitable Remainder Trust as a possible alternative. Could the Charitable Remainder Trust be an answer to your IRA tax question?
Secure Act Eliminates Stretch IRA
The SECURE Act has virtually eliminated the stretch IRA strategy. Prior to the SECURE Act, a non-spouse beneficiary could take distributions from an inherited IRA over their life expectancy. This allowed for the deferral of significant amounts of income tax over the beneficiary’s lifetime. It also allowed the undistributed amounts to continue to grow tax deferred through the beneficiary’s lifetime. That same beneficiary under the SECURE Act will be required to complete full distribution of the IRA within ten (10) years. This represents a rapid acceleration of tax recognition on the IRA which results in a substantial increase in income taxes. As St. Peters Estate Planning Attorney Rosalind Robertson said, “an IRA is a wonderful tool to accumulate wealth but with the introduction of the SECURE Act it is a terrible tool for transferring wealth to our loved ones.”
Charitable Remainder Trusts
The Charitable Remainder Trust (“CRT”) may be an alternative. The CRT will allow your child to stretch the distribution of your IRA for much longer than the ten (10) year window required under the SECURE Act. To use a CRT, you create a trust and you name that trust as the beneficiary of your IRA. The CRT is NOT funded until you die. In other words, you do not put any of your assets into the CRT during your lifetime. Upon your death the provisions of your beneficiary designation trigger the transfer of the IRA to the CRT. As part of creating the CRT you will be naming two beneficiaries. The first is the child or children that will receive the income from the trust for a period of time, up to their lifetime. See https://www.cnbc.com/2020/01/14/a-law-took-this-retirement-strategy-out-of-play-how-to-get-around-it.html. The second beneficiary is the charitable organization that will receive the remainder when your beneficiary’s payments end. See https://www.cnbc.com/2020/01/14/a-law-took-this-retirement-strategy-out-of-play-how-to-get-around-it.html. Prior to your death you can act as your own trustee of the CRT. The CRT is also capable of being amended or revoked in its entirety during your lifetime. You can also use multiple CRTs for multiple beneficiaries. Using a CRT allows you a great deal of flexibility. Should you change your mind or in the event the tax law changes and another strategy more accurately fits your intention, you can change it.
How Charitable Remainder Trust Works
Using a CRT means that your child will not recognize a large immediate taxable distribution. Nor will your child be forced to endure the accelerated taxable distribution imposed under the SECURE Act. Instead the child will receive income from the CRT for their lifetime. That income will be somewhere between five percent (5%) and ten percent (10%) of the CRT assets which is determined based upon certain other requirements. See https://www.thestreet.com/retirement-daily/your-money/charitable-remainder-trusts-an-estate-preservation-tool-with-the-secure-act. The assets placed in the CRT are allowed to grow tax deferred because it is a charitable instrument. Amounts distributed to the child from the CRT are treated as ordinary income up to the amount of the IRA originally funded. Distributions in excess of the original IRA amount are treated as capital gains and would be subject to the more favorable capital gains tax rates. See https://www.thestreet.com/retirement-daily/your-money/charitable-remainder-trusts-an-estate-preservation-tool-with-the-secure-act. One important caveat for the CRT is that at least ten percent (10%) of the assets contributed must be left for the charity. See https://www.cnbc.com/2020/01/14/a-law-took-this-retirement-strategy-out-of-play-how-to-get-around-it.html. In designing the distributions from the CRT, you must factor in the life expectancy of your child and the investment growth rate on the investments to ensure you meet the ten percent (10%) remaining for the charity requirement.
Charitable Remainder Trust Benefits Mimic Parts of Stretch IRA
For people with true charitable intent, this strategy can prove to be a perfect fit. However, for those that are not as charitably inclined, the strategy can still make economic sense when you have an IRA with $500,000 or more. When you figure in the enormous tax advantages of the CRT, your child will often receive significantly more through the use of the CRT than if you simply named them outright as your IRA beneficiary. The CRT may allow your child to receive income over a twenty (20) year period, or longer, significantly reducing the speed at which the SERCURE Act requires income tax recognition. As previously mentioned, it also allows the assets inside the CRT to grow tax deferred. By stretching out payments over the child’s lifetime and allowing tax deferred growth, the CRT strategy closely mimics the previous Stretch IRA strategy. There is one significant departure from the Stretch IRA, what remains in the CRT when your child passes goes to the charity you have chosen. Assuming your child lives for an extended period of time, the tax advantages of the CRT will be significant. However, if your child would pass shortly after you, then the bulk of your IRA would go to the charity you have chosen.
Educating Yourself Through a Vision Meeting
If you or your family are struggling with any Estate Planning or Probate concerns, make an appointment with the experienced St. Charles Estate Planning Attorneys at Jones Elder Law. That way, you can decide what happens to the assets you worked so hard to acquire. If we can help guide you, contact our St. Charles Estate Planning Law Firm at (636) 812-2575 and ask to schedule a call or virtual consultation, what we call a Vision Meeting http://joneselderlaw.com/vision-meeting/. For your safety and ours we have developed the Minimal Contact Planning process to be used while the Covid-19 virus remains a concern.
