Charitable Remainder Trusts and the SECURE Act

The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was enacted on December 20, 2019, and became effective on January 1, 2020.
 
Among several other changes, the act makes it more difficult to stretch out payments from your retirement assets over your beneficiary’s lifetime, replacing it with a required 10-year payout period. The full text is available for reading here .
 
Some IRA owners may be able to replicate the stretch out by using a charitable remainder trust.
 

What is a charitable remainder trust (CRT)?

A CRT is an irrevocable trust that distributes a percentage of the trust assets to one or more of your beneficiaries either for life or for a term of up to 20 years. At the end of the term, the trust ends and the balance of the assets are paid to charity.
 
The Internal Revenue Code sets the rules for the trust to qualify for tax-exempt status, including:
 
• The payout percentage must be at least 5% but not more than 50%.
• The payments may be fixed based on the trust’s initial value or may vary based on the value of the trust each year.
• The designated charity must receive at least 10% of the initial value of the trust.
 

How CRTs are taxed

Because they are tax exempt, the funds distributed from the retirement account or IRA are not taxable to the trust.
 
The payments from the trust will be considered taxable income to your beneficiary. The payments are generally taxed in the following order of the trust’s income: ordinary income, capital gain, other income and the trust’s principal.
 

How it works

As the retirement account owner, you establish an irrevocable CRT while you’re alive, designating the trust as the beneficiary of your retirement accounts. Your estate will receive a charitable tax deduction for the projected value of the portion that will go to charity.
 
Upon your death, your beneficiary receives the payout per the trust terms (5-50% of the trust principal). The trust does not report any income nor pay tax, but your beneficiary does.
 
At the end of the trust term or upon your beneficiary’s death, the balance is paid to the charities designated in the trust.
 

Potential downside

You must have other assets available to pay the estate tax, if any, on the anticipated portion of the trust that your beneficiary will receive. The anticipated payout is the present value of the payouts using the “interest” rate published by the IRS in the month the trust is funded. Because the rate won’t be known until your death, there will be uncertainty as to the payments your beneficiary will receive.
 
Another drawback is that, unlike an inherited IRA from which your beneficiary may withdraw more than the required minimum distribution, the payments from a CRT are fixed and your beneficiary does not have access to the remaining principal.
 
While it may not be the best option for everyone, a CRT for your IRA can be a powerful way to reduce income and estate taxes. Your tax and investment professionals can help with this and other ideas to maximize your legacy to the people and causes you care about.
This material is for informational or educational purposes only and does not constitute investment advice under ERISA. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
 
Investment, insurance, and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
 
This article is for general informational purposes only. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor, CPA and/or attorney for specific advice based on the individual’s personal circumstances. Examples included in this article, if any, are hypothetical and for illustrative purposes only.
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