Last year, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act, as a way of expanding access to tax-qualified retirement accounts like 401ks and IRAs, among other reforms. Certain tweaks were good for retirement account holders, such as increasing the age of mandatory withdrawals, or required minimum distributions (RMD), from 70½ to 72, and eliminating age restrictions for making contributions. Both provisions allow for slightly larger asset growth.
Lawmakers destroyed, however, the longstanding practice of stretching RMD payments over an inherited beneficiary’s lifetime. These so-called “stretch” payments allowed for continued tax-deferred growth of the asset, often taking decades to build, and reduced annual RMD tax obligations due to the spreading of payments over many years. This means that now there may be changes that need to occur in your estate planning as your beneficiaries who inherit tax-advantaged retirement accounts like IRAs must withdraw the entire balance of the account within ten years.
What planning options should you possibly consider right now? One option may be a charitable remainder trust. This type of trust offers similar pre-SECURE Act benefits, if appropriately constructed by an experienced estate planning attorney. For example, a charitable remainder trust is a tax-exempt irrevocable trust that is designed to:
- Disperse income to trust beneficiaries for a specified period of time
- Reduce the taxable income of the beneficiaries
- Donate the remainder of the trust to a designated charity
How can this help? Let us explain further. Instead of leaving a tax-qualified retirement account directly to an adult child, the account holder could make a charitable remainder trust the beneficiary. The account holder would then select the adult child to receive annual income payments from the trust and the payments would be delivered for a specified period of time, including the adult child’s lifetime. In some ways this mirrors the pre-SECURE Act stretch arrangement, as well as including the benefits of continued tax-deferred asset growth and lower annual tax obligations.
After the specified period of time expires, or the death of the adult child, remaining trust assets would be donated to a designated charity. Not only is this an effective tax management strategy, but it also can encourage philanthropy.
If you or someone you know would like more information about charitable remainder trusts and how they might help protect your retirement accounts, do not wait to contact us to schedule a meeting. We look forward to working with you to ensure that your planning goals can be met, no matter what changes occur in the law.