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Sweeten your IRA for your heir

By CAROLYN C. ROGERS - | May 13, 2021

PHOTO PROVIDED Carolyn C. Rogers

If you are looking for ways to benefit your heir(s) with your IRA while supporting your favorite charity, you may be able to “have your candy and eat it too.” Perhaps you remember the iconic 1972 commercial featuring a gentleman eating a chocolate bar who falls down a flight of stairs landing on a little boy holding a jar of peanut butter. “You got chocolate in my peanut butter,” the boy exclaims, giving accidental birth to the Reese’s Cup — two tasty ingredients made better while creating something new and different.

Estate planning, similarly, is all about creating a win-win scenario by combining planning tools to achieve better or different outcomes. This past year, estate planning attorneys have introduced a sweet option to an old standby tool: a charitable trust that replaces the former Stretch IRA that high-net-worth clients have relied upon to benefit heirs.

This creative concept is a direct response to the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) that former President Donald Trump signed on Dec. 20, 2019, and that made several meaningful changes to existing retirement plan law. A noteworthy feature of the SECURE Act eliminated the ability of most non-spouse beneficiaries who inherited an IRA to “stretch” the RMD payments over their lifetimes. Since the inherited IRA assets continued to grow tax-free during the distribution period, this had been a significant benefit and life-long income stream to beneficiaries. The SECURE Act forces the beneficiary to distribute all the IRA’s assets, and pay all the ordinary income taxes, within 10 years.

Estate planners have since devised a delectable workaround — clients can establish a Charitable Remainder Unitrust (CRUT) that gets funded by the IRA at death for the benefit of a non-spousal beneficiary. This new planning tactic not only provides income for their heir(s) over their lifetimes but also saves taxes. This technique has the added benefit of providing a deferred gift to the client’s favorite charity or charities.

This is what happens when you mix your metaphoric chocolate IRA into a peanut butter charitable trust. The value of the IRA, and the value of the charitable gift, is determined at the time of death. Since the CRUT is treated like a non-profit when funded with the assets from the IRA, there are no capital gains or taxes on income, and the trustee can sell or convert the IRA assets and reinvest them within the CRUT. In addition, the donor predetermines a percentage annual payout to the heir(s) of the trust’s assets (at least 5 percent every year, but not to exceed 50 percent). The trust can be in effect either for the lifetime of the beneficiary(ies), a fixed term not to exceed 20 years, or some combination. The trust can also protect the assets from a beneficiary’s creditors, can be excluded as marital property in a divorce, and can provide the beneficiary a lengthy predictable income stream.

CRUTs are ideal replacements for the Stretch IRA for families with substantial retirement plan assets ($500,000 or more) who seek to provide a life income to a middle-aged or older heir and a significant charitable gift. They are also advantageous for those concerned about their heirs having too many assets put at their disposal too soon. As the name implies, the remainder of the assets at the end of the trust will be paid to one or more charities predetermined by the donor.

There are drawbacks to these strategies. For one, the life beneficiary cannot receive anything more than the specified payout. Additionally, the remainder in the trust that is gifted to charities must exceed 10 percent of the value of the CRUT when it was established, and the trust must be managed to take into account the age of the beneficiary and the remainder value. Finally, the beneficiary could unexpectedly pass away thereby ending the trust before the lifetime benefits can be enjoyed.

Nevertheless, if you are considering ways to benefit both your heir(s) and your charities with your IRA, this tested estate planning vehicle could be the ideal solution.

Carolyn C. Rogers is senior vice president and wealth services advisor at The Sanibel Captiva Trust Company.