If you follow changes in tax laws, you may have heard about the 2020 SECURE Act. For those who are unfamiliar, SECURE stands for “Setting Every Community Up for Retirement Enhancement.” In a nutshell, the SECURE Act dramatically changed the rules for inheriting qualified retirement accounts. Whereas in the past, most beneficiaries could stretch distributions from a retirement account out for the remainder of the individual’s life expectancy, under SECURE, unless an individual qualifies for a narrow list of exceptions, the old treatment no longer applies. Instead, most individuals now have a default 10 year payout rule to withdraw the entire balance of an inherited retirement account—and therefore, pay the entire tax liability.
In the months since SECURE took effect, planners have been exploring options to help clients mitigate the impact the new rules will have on their estate plan. All hope of tax advantages is not lost—especially for charitably-minded individuals. For a person who likes the idea of eliminating income taxes, wants to include a charitable beneficiary, and desires to provide for a human beneficiary for the remainder of that person’s life, a Charitable Remainder Trust (CRT) could be an option.
Let’s say you want to leave your IRA to the Humane Society but you also want to provide for your 50 year old son. You establish a CRT to fund the gift. Upon your death, the CRT receives and cashes out the IRA income-tax free, and then pays income to your son for the remainder of his lifetime.
There are two types of CRTs: Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs). The concept is the same for both, but the payout to the human beneficiary is different. In a CRUT, a fixed percentage of the trust assets is distributed each year (so the amount varies annually), whereas with a CRAT, a fixed annuity amount is paid to the beneficiary every year.
This blog just scratches the surface of planning with CRTs. If you’d like to discuss in more detail, please give us a call. One of our attorneys would be happy to sit down with you to help determine whether or not a CRT might be a worthwhile addition to your estate plan.