Recent changes to federal provisions governing tax-qualified retirement accounts like 401ks and IRAs could spell disaster for those planning on leaving such accounts to their loved ones as an inheritance. A charitable remainder trust can be an attractive alternative that we have shared with our clients. Let us provide you with more information on why you may want to consider it as a part of your planning and discuss it with us in a meeting at our law office. 

Last year, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE Act. The reform is meant to help Americans build retirement savings by expanding access to tax-advantaged retirement accounts to part-time workers and participating small businesses, among other items. The SECURE Act also increases the age of mandatory account withdrawals, or required minimum distributions (RMD), from 70½ to 72, and eliminates age restrictions for making contributions to 401ks, IRAs and similar accounts. 

The SECURE Act, however, also includes a significant tweak that effectively eliminates the longstanding practice of “stretch” payments, or making annual RMD payments stretch-out over the course of the retirement account beneficiary’s lifetime. The benefit to stretching payments was two-fold: it allowed for the account to continue to grow tax-deferred, and it reduced the annual RMD tax obligation by spreading the payments over many years. That is no longer the case. 

As of January 1, 2020, however, non-spousal beneficiaries will have to liquidate inherited tax-advantaged accounts within 10 years or face a stiff tax on the full balance of the account. This means less tax-deferred growth and larger tax liabilities for beneficiaries. What you may not realize, though, is that a charitable remainder trust can mimic pre-SECURE Act benefits while also supporting a charity of your choice. 

Instead of bequeathing a tax-advantaged retirement account directly to a beneficiary, the account holder would make the charitable remainder trust the beneficiary. The account holder would then select an individual to receive annual income payments generated from the trust and those payments would be delivered for a specified period of time, including the individual’s lifetime. This works to achieve continued tax-deferred growth and limited annual tax liabilities. Further, after the specified period of time or the death of the selected individual, any remaining trust assets would be donated to a designated charity. 

We know this article may raise more questions than it answers. If you or someone you know would like more information about charitable remainder trusts, we encourage you to ask us. We can meet with you to discuss how they might help protect your retirement accounts and what we can do to ensure your goals for your legacy are achieved.