How can the SECURE Act influence retirement and estate planning? Jackie Bedard, a trust-and-estate attorney in Wake County, NC, explains.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act received Senate approval in December 2019. One primary purpose of this far-reaching bill was to help senior Americans save for retirement and keep them from outliving their savings.
Among other reforms, the SECURE Act:
facilitated affordable and straightforward retirement plans for small businesses
allowed many part-time workers to participate in employer retirement plans
raised the age of RMDs (required minimum distributions) to 72
enabled citizens to keep contributing to their IRA accounts indefinitely.
The SECURE Act and Inheritance
The SECURE Act brought one particular cause of concern to many people. It requires non-spouses who inherit IRAs to empty the account within ten years. This mandate removed the stretch IRA, or life expectancy payout, from the arsenal of asset protections.
In other words, before the SECURE Act, people with large IRAs could count on a lifelong payout for loved ones whom they wanted to protect, such as children or grandchildren. Today, many of our North Carolina clients wonder whether the SECURE Act leaves them any options of providing lifelong support for family members other than their spouses.
Charitable Remainder Trust: A Solution to SECURE?
A CRT, or charitable remainder trust is one option that estate planners may offer their clients as a way to provide for their chosen beneficiaries.
Under this model, the client sets up a CRT and names it the direct beneficiary of their IRA account. The CRT receives the IRA funds tax-free upon the client’s passing and then pays a life income to a human beneficiary the client has chosen.
How does this work?
Let’s say 80-year-old Steve wants to leave his $1 million IRA as a lifelong provision for his middle-aged daughter, Janet. He names a charitable remainder trust as the IRA account’s beneficiary. Every year, Janet will receive 5% of the CRT’s value.
During the first year, Janet’s payout will be $50,000. Further payouts may fluctuate depending on the value of the trust’s investments. If the investments yield a constant return of 5%, Janet will continue to receive a secure provision of $50,000 for as long as she lives. If, however, the trust’s investments depreciate, Janet’s income may decline.
It is also essential to keep in mind that Janet will need to pay taxes on her payout as taxable income while a CRT is tax-exempt.
When Janet passes away, any funds that remain in the CRT will transfer to the charity that Steve, Janet’s father, had specified in his will.
The CRT Option: Advantages
Naming a CRT as a beneficiary to an IRA is a safe, tried-and-true way to secure a lifelong income for a loved one as well as a deferred gift to a charitable cause in the future. Now that the SECURE Act has taken the stretch IRA off the table, one may assume many clients with sizable IRAs will choose the CRT option as part of their estate planning strategy.
For non-spouse beneficiaries, the CRT can effectively provide a workaround to mimic the former stretch IRA option by creating income payments for life that are similar to the annual distributions the beneficiary would have received under the stretch IRA, which may be beneficial both from a tax perspective and for beneficiaries who may need some guardrails for prudently managing their inheritance. In some instances, the lifetime beneficiary may stand to receive more via the annual CRT distributions than they would if forced to liquidate and pay taxes on the IRA within 10 years as required by the SECURE Act.
The CRT model offers several variations, such as annuity vs. percentage payouts. A consultation with an asset protection attorney can help you understand the nuances of these possibilities.
Suppose the CRT’s sole human beneficiary is the surviving spouse of the IRA owner. In that case, estate tax planning becomes even easier since the spouse qualifies for the marital deduction while the charity qualifies for the charitable deduction.
The CRT Option: Drawbacks
In some circumstances, setting up a charitable remainder trust might not answer the IRA owner’s goal of providing for a surviving family member.
When the human beneficiary of the CRT passes, the minimum charity’s remainder interest – what the specified charity ultimately inherits – must equal at least 10% of the original trust value.
This requirement most likely won’t be a problem in the case of middle-aged Janet, but Steve might not be able to guarantee a similar provision for his 15-year-old grandson. He would have to explore different options, such as setting up the trust for a limited number of years.
Furthermore, under a CRT life income plan, the beneficiary can only receive a pre-determined annual payout. The beneficiary cannot draw extra funds in emergencies or during periods of increased expenses. While this provides specific financial protection to the beneficiary, it can also limit them in many ways.
Some clients may be concerned about the potential loss of multi-generational planning. For example, under the old rules, if a client left their IRA to their adult child who exercised the stretch IRA, when the adult child passed away, any remaining value could pass down to the client’s grandchildren. With a CRT, any remaining value would instead pass to charity. However, if structured properly and combined with other estate planning tools, your trust-and-estate attorney may be able to create a win-win-win situation that provides income for your adult children, a future inheritance for grandchildren, and a donation to a charity of your choice.
Jackie Bedard: Your Estate Planning Attorney in Cary, NC
At Carolina Family Estate Planning, we help families build better lives by planning for a secure future via estate planning, asset protection, and long-term care planning. If you wonder about the strategies that would afford maximum protection for your loved ones after your passing, we’re here to help you get your ducks in a row.
Need a trust and estate attorney in Wake County, NC? Schedule a needs assessment call at 919-443-3035 or complete our online form to set up a vision meeting with a member of our experienced, caring, and dedicated legal team at Carolina Family Estate Planning to discuss your estate planning goals.
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