With the advent of the SECURE Act, leaving your IRA to your children is not as great as it used to be.
Back in the olden days, before 2020, you could leave your IRA to your children, and they could let it grow tax free for their lifetime and only have to take out a minimal taxable amount each year. This was called a "stretch-out IRA." It was a fantastic way to maximize the benefits of your IRA for your children.
But with the SECURE Act, starting January 1, 2020, inherited IRAs can only last 10 years (with some exceptions for young or disabled beneficiaries). Forcing taxable distributions out within ten years rather than a child's lifetime, will result in a $15.7 billion revenue increase in the next ten years according to the Congressional Budget Office. Good for Congress, bad for your children.
But there is a solution.
Planned giving experts say 25% of Americans make regular charitable gifts, 50% are occasional givers and 25% are Ebenezer Scrooge. If you are among the 75% charitably inclined, you can use a Charitable Remainder Trust (CRT) to return your IRA to the pre-SECURE Act glory days of the stretch-out IRA.
Here's how it works.
- Your estate planning attorney will create a Charitable Remainder Trust (CRT) which can pay your children 5% per year for their lifetime, and when your surviving child has passed away, the charity of your choice will receive the remainder.
- After you sign your CRT, you name your CRT as the beneficiary of your IRA.
- When you pass away, your IRA will be distributed to the CRT, tax-free, and and the investments will grow tax free.
- The annual distributions to your children are taxable to them as ordinary income - just like an IRA, but the distributions can stretch-out for your children's lifetime - way longer than the ten-year SECURE Act term.
- Also, the investments in the CRT are significantly protected for your children from divorce claims and lawsuits. This is in stark contrast to an inherited IRA, which is not protected.
- And when your surviving child dies, your legacy can be emblazoned as a sponsor of your favorite show on PBS. "This show was brought to you by the YOUR NAME charitable trust."
Some estate planners call an IRA CRT a "give it twice trust." You give to your children by minimizing their tax hit, stretching out the benefits and keeping the investment protected from divorce and lawsuits, and the remainder is given to your favorite charity.
We would be glad to talk with you and your financial advisor to see if using a CRT as beneficiary of your IRA is a good choice for you and your family.