Last year, Congress passed a sweeping retirement reform known as the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act. The legislation is intended to help more Americans obtain retirement assets by expanding access to “tax-advantaged” retirement accounts like 401ks and IRAs, among other reforms. For your estate planning, however, a potentially costly change was also included and a charitable remainder trust is a solution that many account holders and prospective retirees should consider.
Effective January 1, 2020, non-spousal beneficiaries who inherit tax-qualified retirement accounts will have to liquidate them within ten years or face a stiff tax on the investment all at once. Previously, beneficiaries could “stretch” the annual required minimum distributions (RMD) of an inherited account over their lifetime and thus benefit from continued tax-deferred growth as well as smaller annual income tax liabilities given the RMD payments were spread out over many years. Now, without estate planning that understands these changes, beneficiaries could receive larger tax bills and less overall growth.
For these reasons, a charitable remainder trust may provide an attractive alternative within your estate planning. A charitable remainder trust is a tax-exempt irrevocable trust that is designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to a designated charity.
In other words, the trust would be the beneficiary of an IRA when the account holder dies. Then, a trust beneficiary would receive annual income payments from the trust for either a defined period of time or over his or her entire lifetime. This method is similar to pre-SECURE Act stretch payments. After the term expires or the beneficiary dies, a designated charitable organization would receive the remaining value of the trust.
Once again, the benefit of this estate planning strategy is both a tax-deferred account growth and an annual beneficiary income with a reduced tax bill. In addition to tax management, charitable remainder trusts offer other benefits for retirement and estate planning that can allow for people to pursue philanthropic goals while generating income. If you or someone you love would like more information about the SECURE Act and how a charitable remainder trust may benefit your retirement accounts as well as your estate planning, we encourage you not to wait to find the answers you need. You are welcome to contact our law practice now, or at any point in the future.