Millions of Americans have worked hard, saved for retirement and planned to give their remaining assets to loved ones when they pass away. If those assets involve tax-qualified retirement accounts like 401ks or IRAs, however, then you may want to contact an experienced estate planning attorney and discuss a charitable remainder trust.
As of January 1, 2020, non-spousal beneficiaries who inherit tax-advantaged retirement accounts will no longer be able to “stretch” annual required minimum distribution (RMD) payments over the course of their lifetimes. This was a longstanding practice that was virtually eliminated last year by federal legislation known as the Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act. The law is intended to boost retirement savings for more Americans by expanding access to 401ks and IRAs, along with a number of other provisions, but costly changes were also included.
Prior to the SECURE Act, retirement account beneficiaries could opt for lifetime RMD payments and reap the benefits of continued tax-deferred account growth and reduced annual tax bills due to the lifetime period of distributions. Now, applicable retirement accounts must be liquidated within 10 years. That means less tax-deferred growth and higher tax liabilities for beneficiaries.
A charitable remainder trust, however, can provide a solution. A charitable remainder trust is designed to generate income, reduce taxes and support philanthropic activity. Instead of bequeathing a tax-advantaged retirement account, like an IRA, directly to a non-spousal beneficiary, the account holder would make the charitable trust the beneficiary. Then, the account holder would select an individual, perhaps an adult child, to receive annual income payments from the trust for a specified period of time, including the adult child’s lifetime.
This mirrors the pre-SECURE Act stretch arrangement and includes the benefits of tax-deferred asset growth and lower annual taxes. Plus, after the specified period of time or the death of the adult child, remaining assets in the trust would be donated to a charity to help others.
We know this blog may raise more questions than it answers. If you or someone you know would like more information about charitable remainder trusts and how they might help protect your retirement accounts, do not wait to contact our law practice today.