Congress has tried to eliminate the Stretch IRA for years and now they've finally done it, and no one is talking about it. The Stretch IRA allowed a non-spouse beneficiary of an IRA to withdraw from the IRA over the beneficiary's life expectancy, essentially stretching the benefit of the IRA into the next generation. The Stretch IRA was particularly useful if you wanted to leave your IRA benefits in trust for your heirs, to be professionally managed for the next generation. The ability to do this planning is now totally dead.
By now you know all about the SECURE Act and how it is eliminating the Stretch IRA for people dying after January 1, 2020, if not, check out part one of our series here. In place of the stretch IRA, the SECURE Act will require all non-spouse beneficiaries to withdraw the entire balance from the IRA within 10 years of the owner's death. Any trust planning or attempts to stretch those benefits out over the life expectancy of the beneficiary are gone with the passing of the SECURE Act. Or are they?
You can still provide security for your heirs, make an IRA last for years after you, solve several estate planning problems, and benefit a charity. All you have to do is join the growing trend of naming a charitable trust as beneficiary of your traditional IRA.
John Smith is a widower in his 80s who has a $1 million traditional IRA and several adult children. The children are in their 50s and 60s. He creates a charitable remainder trust and names it beneficiary of the IRA. After John passes away, the IRA will be distributed to the charitable remainder trust. The trust will make a distribution of a fixed percentage or dollar amount to the children each year for the rest of their lives, which will presumably be longer than the 10-year mandatory payout under the SECURE Act. After the children pass away, the remainder in the trust will go to a charity or charities designated by John when he created the trust. John could set up a separate trusts for each child to avoid conflicts and allow the charities to receive contributions as each child passes away.
From a tax perspective, the trust isn’t taxed on either the distribution from the IRA or income and gains it earns. The children likely will owe taxes on distributions from the charitable remainder trust. The upside is that the charitable remainder trust can last much longer than the 10-year payout provisions contained in the SECURE Act. What this means is that for individuals wanting the benefit of the Stretch IRA, the charitable remainder trust becomes a practical vehicle to obtain all the benefits of the stretch and the additional incentive of benefiting a charity after the lifetime of their children.
As I said, there’s a lot of flexibility in this strategy. It certainly beats the new default after January 1, 2020 of mandating the payout of the total balance of the IRA within 10 years of the death of the account owner.
The charitable remainder trust provides the tax deferral and many of the other benefits of the Stretch IRA. In the wake of the demise of the Stretch IRA, we're advising all of our clients to consider charitable remainder trust planning if they want to achieve the benefits they previously thought they would enjoy using the Stretch IRA.