The SECURE (Setting Every Community Up For Retirement Enhancement) Act of 2019 was signed into law on December 20, 2019. It makes significant changes in how those who inherit an IRA account must make withdrawals from such accounts.
Before 2020, if an individual owned a qualified retirement plan account like an IRA and died, and the IRA went to a beneficiary other than a spouse (like adult children), the IRA distributions could be stretched over the lifetime of that non-spouse beneficiary (age 30, over 53 years; age 55, over 30 years). There was an opportunity for continued growth in the value of the investments because there was not a requirement for immediate distribution of the balance which could result in a large tax liability for the beneficiary, especially if the inherited IRA is received in the beneficiary’s peak earning years.
The new law provides that for non-spouse beneficiaries (spouses can still withdraw over their own lifetime), distributions are required over a 10-year period. These distributions do not need to be withdrawn every year, but the entire account must be withdrawn by the end of the tenth year following the death of the account owner. This will potentially result in a larger tax liability for the beneficiary, especially if the IRA is sizeable. Additionally, the opportunity for tax-deferred growth of the assets may be much smaller over 10 years rather than life expectancy. If the beneficiary is a minor child, the required distributions can be stretched to the age of majority (18 in Michigan) plus 10 years thereafter (maximum age 28).
Is there any strategy by which an IRA account owner can “stretch” out an inherited IRA in light of this new 10-year rule? There is, if an account owner has some charitable inclination!
Account owners may not want their non-spousal beneficiaries to receive their IRA proceeds within 10 years, but would like the idea of leaving a steady stream of income to their heirs over the heirs’ remaining lifetime. A testamentary Charitable Gift Annuity
(CGA) or testamentary Charitable Remainder Trust (CRT) could be the solution. An individual can name a CGA or CRT as a beneficiary of their IRA account and the IRA proceeds will then be used to fund a testamentary CGA or CRT.
CGAs are most associated with a desire to create a level income payment for the beneficiary and are agreements between the account owner and a public charity which agrees to pay a fixed amount of money to the beneficiary for life or a set number of years (i.e. 20).
A CRT is often designed to annually pay the beneficiary a percentage (i.e. 5%) of the value of the trust and tries to capture investment market returns to increase the value of the trust and thus increase the annual payment to the beneficiary. However, if the marketable securities go down in value, so will the annual payment.
Upon the death of the beneficiary, the remaining principal of either approach belongs to the charity (CGA) or is paid over to a public charity (CRT).
While this article has explored two ways to “stretch” IRA inheritances, the SECURE Act touches on other tax and estate planning issues which would be beneficial to review with your financial advisor or estate planning attorney.
This information is not intended as tax, legal or financial advice. Consult your personal financial advisor for information specific to your situation.