Kathleen ReynoldsKeymasterNovember 7, 2022 at 11:17 pmPost count: 428
In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed that eliminated the “Stretch” for non-exempt beneficiaries. For those who inherited an IRA from an original owner who passed away after December 31, 2019, the new rule will force distributions to fully liquidate the plan balance within ten years following the original owner’s death.
If an IRA owner died before 2020, the “Stretch” is still allowed. This provision only applies to IRA owner deaths in 2020 and beyond and for non-spouse beneficiaries who do not meet the exemption status. To be classified as exempt, the beneficiary must be one of the following:
- A surviving spouse.
- A disabled or chronically ill person
- A beneficiary who is less than ten years younger than the plan owner
- A minor child who has not yet reached the age of majority. Once the minor child has reached majority age, the 10-year payout rule would apply.
A key component of the Secure Act is to eliminate the “Stretch IRA”. With the old rules, a beneficiary would inherit the plan and have required minimum distributions made based on formulas that included the beneficiary’s life expectancy. The net effect allowed those distributions to be made throughout the beneficiary’s lifetime. With the SECURE Act’s ten-year payout, the beneficiary’s AGI is significantly impacted in those ten years (instead of stretching the distributions out over the lifetime, resulting in a smaller yearly AGI impact).
An excellent technique to counteract the SECURE Act’s 10-year rule is to have the beneficiary of the IRA be a Charitable Remainder Unitrust (CRUT). This allows the Trust to distribute payments based on a percentage of the Trust balance each year.
In addition to the payments from the CRUT, a charitable deduction could be allowed based on the factors you use to set up the CRUT. In this model, the estate tax is calculated as if no CRUT was established, and then also with the CRUT’s deduction. This technique shows an added benefit to establishing a CRUT.
When a Charitable Remainder Unitrust is established, a donor transfers cash or property to an Irrevocable Trust but retains (either for himself or for one or more non-charitable beneficiaries) a variable annuity (payments that can vary in amount but are a fixed percentage) from that Trust. At the end of a specified term, or upon the beneficiary’s death (or beneficiaries (the donor’s spouse can be the beneficiaries)), the remainder interest in the property passes to the charity the donor has specified.
A gift to a Charitable Remainder Unitrust will qualify for Income and Gift Tax charitable deductions (or an Estate Tax charitable deduction) only if the following conditions are satisfied:
- A fixed percentage (not less than 5% or more than 50%) of the assets’ net fair market value is paid to one or more non-charitable beneficiaries living when the Unitrust is established.
- The charity’s actuarial interest must be at least 10% of any assets transferred to the Trust.
- The Unitrust assets must be re-valued each year.
- The fixed percentage amount must be paid at least once a year for the term of the Trust.
- The term of the Trust must be a specified period of 20 years or less or must be until the death of the non-charitable beneficiaries, all of whom must be living at the beginning of the Trust.
- No amount can be paid (except the fixed percentage during the term of the Trust and at the end of the Trust’s term).
- The entire balance of the Trust’s assets must be paid to one or more qualified charities.
Click the Edit button to set the specifications of the CRUT IRA:
- The name of the CRUT IRA
- The type of calculation: This technique assumes a Testamentary type of calculation.
- The year in which the transfer takes place
- The §7520 rate
- To select the asset to use to fund this technique, click the ‘+’ button.
- Verify the amount listed as FMV.
- Percentage Payout Enter the payout rate of the annuity. The annuity must be at least 5% and less than 50%.
- Cost Basis Enter the cost basis.
- Enter the years of the term of the trust: If you chose a term or shorter trust, enter the number of years that the trust will last.
- Select the payment period: Select the number of payments that will be made during a normal full year to the beneficiary (Annual, Semiannual, Quarterly, Monthly, and Weekly).
- Verify the client’s age.
- Months Valuation Precedes Payout: Enter the number of full months by which the valuation date (for the assets of the unitrust) precedes the first payout in the first full taxable year of the trust (not the short first year). The program will only allow valid input values according to which Payment Period was selected in the previous entry field. Growth is applied on the payment schedule before payments are calculated unless Months Valuation Precedes Payout is zero. This does not pertain to the planning period before the trust goes into effect.
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