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Estate Planning Alternative to the SECURE Act’s 10-Year-Rule

Published July 15, 2020

Our team previously provided updates on the SECURE Act, effective January 1, 2020, which eliminated the “Stretch IRA” provisions for anyone other than the surviving spouse.  Beneficiaries of inherited IRAs must now withdraw the entire amount from inherited IRAs within 10 years of receiving it.  Prior to January 1, 2020, a beneficiary could stretch their distributions throughout their lifespan.  A 30-year-old beneficiary would take smaller distributions at a lower income tax bracket and allow the IRA principal to grow.  Now, a 30-year-old beneficiary must withdraw the entire amount in the IRAs within 10 years.  This substantially limits the long term tax deferral.

New York Long-Term Care Planning Attorneys

 A spouse, charities, and charitable trusts are exempt from the 10-year tax acceleration rule imposed by the SECURE Act.  To that end, we have an estate planning alternative to the relatively short 10-year withdrawal rule.  To utilize this exemption, you can establish a Charitable Remainder Trust (“CRT”) and name the CRT as the beneficiary of your IRA.  You can name your spouse as the first beneficiary to the IRA and then the spouse can name a CRT as the beneficiary upon the spouse’s death.  Your children are then named as the beneficiaries of the CRT.

A CRT is a trust that takes ownership of certain assets and provides an income stream from those assets to the CRT beneficiaries (your kids) for their lifetimes.  Any assets that remain after the deaths of all beneficiaries to the CRT eventually go to your designated charities.

There are two types of CRTs: (1) Charitable Remainder Unitrust (CRUT) and (2) Charitable Remainder Annuity Trust (CRAT).  The difference between the two types of CRTs is in the method of calculating the annuity payments to the beneficiaries.

With a CRUT, the annuity payments to the beneficiaries are a percentage of the fair market value of the donated assets.  This amount fluctuates based on changes in current fair market value.

 With a CRAT, the annuity payments are a fixed percentage of the fair market value of the donated assets as of the beginning of the creation of the trust.  The payments will not change based on market fluctuations.

As the CRT is not limited to the 10-year rule, the CRT can “stretch” the income from the IRA over the lifetime of the CRT beneficiaries.  In other words, the CRT distributes the income to the beneficiaries throughout their lifetimes.  The restrictive ten year distribution doesn’t apply.  Indeed, CRT distributions are taxable income to the recipients; though required minimum distributions are also taxable income to the IRA beneficiaries.   We note that some CRUT distributions can come out as favorable capital gains and not ordinary taxable income.

This alternative allows your children, or other CRT beneficiaries, to enjoy income distributions for their lifetimes as CRT beneficiaries as opposed to only ten years upon your death as the new SECURE Tax law requires.

Our team is always available to discuss your estate planning needs. Contact us here.

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