By Chris Kelly
Executive vice president, Tennessee Baptist Foundation
On Dec. 20, 2019, President Donald Trump signed the SECURE Act (Setting Every Community Up For Retirement Enhancement Act) into law with many of its provisions going into effect on Jan. 1, 2020. SECURE arguably makes some of the most sweeping changes in years to the retirement account (IRAs, 401ks, etc.) landscape. While many of these changes have a significant impact on most retirement-age Americans, this article will focus only on the provisions of the Act that affect estate planning and charitable giving with retirement accounts.
Prior to SECURE, when a retirement account owner reached 70-and-a-half years of age, he or she had to take required minimum distributions (RMDs) based on his or her life expectancy (Note: SECURE increased the age for mandatory distributions to 72 years of age). When the one receiving RMD payments died, the RMD payments still had to continue after the owner’s death. However, if the owner had named a non-spouse beneficiary to inherit the account (into a beneficiary IRA), the new beneficiary owner could recalculate the payout plan from the retirement account based on the new owner’s life expectancy. Thus, if the beneficiary was significantly younger than the deceased owner, he/she could extend the payout term over more years than the owner could. Thus, the new owner could benefit by leaving more money to grow in the account longer for his/her lifetime tax deferred, while also deferring the income tax payments as well. These types of IRAs were labeled “stretch” IRAs, since the payments could be spread over many years.
The SECURE Act changed these rules by requiring a non-spouse beneficiary to withdraw all the funds in the IRA no later than 10 years after the date of the IRA owner’s death. (NOTE: the “stretch” provision is still an option for spouses, qualified disabled beneficiaries, minors, and those beneficiaries currently receiving distributions). While there is still a stretch over the 10-year period for the non-spouse beneficiary, the new law does not allow for the possibilities for the long periods of tax deferral as before.
So is the “stretch” IRA dead? In some forms, it is. However, for an IRA owner who wishes to provide income for beneficiaries after the owner’s death and additionally has charitable inclinations to support organizations like his/her church after death, utilizing a particular type of trust, known as a Charitable Remainder Trust (CRT), may still be a beneficial technique to employ in order to extend the payments beyond 10 years.
With a CRT, an owner can provide an income stream for a beneficiary for up to 20 years, thus potentially doubling the payout period allowed under SECURE. After the term for payment to beneficiaries has passed, any remaining funds are then paid to the charity. Because the trust is a charitable trust, the income tax provisions for the beneficiaries are generally more favorable than an outright distribution from the IRA.
To employ this technique, the owner creates the CRT through his/her Last Will and Testament or Revocable Living Trust. In the trust, the owner names the individuals to receive distributions during the first phase of administration and then names the charity to receive the remaining funds after the payout phase is concluded. To complete the strategy, the owner designates the trust as the beneficiary of his/her IRA. At death, the trust is then funded with a distribution from the IRA, and the Trustee ensures that the terms of the trust are honored.
It is worth noting that the CRT is not a new technique. Many people have already incorporated a CRT into their estate plan. However, under SECURE, the exact language used in the CRT is more important than ever. Some of the language used in these trusts prior to SECURE may now actually force the funds out to the beneficiaries sooner than originally planned. Thus, if you have a CRT in your current estate plan, it is critical to having your plan reviewed by your attorney to ensure it still accomplishes the goals for your planning.
The Tennessee Baptist Foundation exists as a resource for Tennessee Baptists for estate planning questions. If you have any questions about any information in this article, please feel free to contact us at 615-371-2029.
Please note that the advice offered in this article is not intended to be construed as tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice for the reader. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. B&R