Post SECURE Act Legacy Planning for the Philanthropically Inclined

By Sean Moore

Older couple sitting with an estate plannerThe SECURE Act created a number of changes across the retirement landscape, from extending the Required Minimum Distribution age, to completely eliminating the age restriction on Traditional IRA contributions.  While those are important changes to be aware of, one of the most considerable, and potentially most detrimental changes, is the elimination of the “Stretch IRA.”  This change has created numerous legacy planning issues, and can have an enormous impact on the taxation of inherited assets. However, a lot of these issues can be alleviated with effective planning for those who are charitably minded.

So, what is the “Stretch IRA?”  Similar to a normal Traditional IRA, an Inherited IRA has Required Minimum Distributions (RMDs) that are due each year, and these distributions are subject to ordinary income tax.  Prior to the passage of the SECURE Act, the RMDs for an Inherited IRA would begin the calendar year after the death of the original owner, and would be based on the life expectancy of the beneficiary.  This means that the beneficiary could “stretch” the RMDs of the Inherited IRA over the course of their lifetime.  This had obvious tax advantages, as the distributions would not create large tax consequences since they would not be particularly large.  Additionally, there was the possibility of an Inherited IRA providing a benefit for two to three generations.

What did the SECURE Act change?  With the passage of the SECURE Act, the “Stretch IRA” was eliminated by requiring that the full amount of the Inherited IRA be distributed within 10 years of the death of the original owner.  This causes a number of tax issues, as there is the potential for very large, required distributions from these accounts so that the account can be fully withdrawn in ten years.  To compound that issue, most IRAs are inherited during the peak earning years of the beneficiary, so they are likely in the highest tax bracket they will see in their lifetime.  Moreover, the use of “see through” trusts to limit the annual distributions to beneficiaries have completely lost their intended benefit, and can create a legacy planning disaster.

With all of these changes, the clear question is: what is a way to create a lasting legacy using IRA money?  The good news is that there is something that can be done to mimic the Stretch IRA, assuming a person is charitably inclined, through the use of a Charitable Remainder Trust (CRT).

A CRT is a special kind of trust that allows for a grantor to contribute assets to it, then take an income stream from that trust until the day they die, at which point the remaining value of the trust is distributed to a pre-determined charity.  This matters for someone looking to mimic the Stretch IRA, since the CRT can be named the beneficiary of their IRA, and the income recipient can be whoever they want to inherit the money.

By naming the CRT the beneficiary of an IRA, the trust is funded upon a person’s death.  This creates a scenario where the income stream from the trust can be distributed over the lifetime of any person the grantor wants it to be.  There will be no Required Minimum Distribution in the same way that an inherited IRA used to have, but there will be an annual distribution from the trust based upon the way it was designed by the grantor—this is how the asset can be stretched out over the lifetime of another person to create a lasting legacy.

The CRT is relatively complex, but there are a few simple rules that are the most important to be aware of when considering this strategy.  First, the income taken from the trust must be at least 5%, but no more than 50%, of the annual value.  Second, the distribution period is either the lifetime of the income recipient or a period of time no longer than 20 years.  Lastly, the value of dollars left over in the trust after distributions must be no less than 10% of the original value of assets used to fund the trust.

Obviously, this strategy is not for everyone as there are minimum dollar amounts that actually make it useful, and – more importantly – there is a not insubstantial investment of time and money to determine if it is the right solution.  The CRT can be an incredibly useful tool for estate planning, but there is a lot of nuance that is well beyond the scope of this piece. With that in mind, it is important that anyone considering this strategy consults with their financial advisor, accountant, and attorney, before implementing it.

Sean Moore is an Associate Advisor and Director of Operations at Moore Wealth, a Frederick, MD based wealth management firm. 

Should you or a loved one be interested in learning more about planned giving options at the YMCA of Frederick County, please contact YMCA Vice president of Social Responsibility Tom Clingman at 301-663-5132 or .