Should I Make My IRA Payable to a Charitable Remainder Trust?

Prior to the enactment of the SECURE Act on January 1, 2020, the tax deferment benefit for a non-spouse beneficiary of an IRA was substantial. For example, a child could be the beneficiary of an IRA and receive the economic benefit of the payments stretched over their life expectancy. A significant advantage of this stretch was that the beneficiary could have considerable control over the timing and amount of the distributions. If a parent passed away when a child was in their higher income earning years, the child could wait until retirement to take larger distributions, thereby leveraging the tax-free compounding of the IRA with tax-efficient timing of the distributions.

Now, with the SECURE Act, except for some specific exceptions, a non-spouse beneficiary must take out the entire IRA over a ten-year period. This ten-year payout can cause a substantial acceleration and increase in the beneficiary’s tax liability. In a sense, because of the elimination of the stretch IRA, the SECURE Act functions as an estate tax on IRAs payable to non-spouses.

One strategy to reclaim the benefits of the stretch IRA is to designate a Charitable Remainder Trust as the beneficiary of an IRA. With a properly structured Charitable Remainder Trust, the beneficiary can take out either an annual set annuity (“Charitable Remainder Annuity Trust” or “CRAT”) or an annual percentage of the IRA (“Charitable Remainder Unitrust” or “CRUT”), typically in the range of five to ten percent, for the remainder of his or her life. On the beneficiary’s death, the remaining balance will pass to the charity or charities designated; hence the “Remainder” in the name, “Charitable Remainder Trust.” 

For clients who are charitably inclined and believe that their children or beneficiaries have a significant likelihood of longevity, the tax savings of making an IRA payable to a Charitable Remainder Trust is compelling. The general rule is that, depending on the rate of return, a beneficiary would need to live approximately 20 years to receive a similar benefit to the benefit that would have been received had the prior “stretch rules” still been in place. Regardless, after about 10 years the tax benefits of a Charitable Remainder Trust become significantly more attractive than having the account payable outright to children or other beneficiaries. In addition, depending on the rate of return, a unitrust (percentage) payout may allow a beneficiary to have a higher annual payout.

How you structure the terms of the Charitable Remainder Trust depends on your individual goals and your best guess of how long your IRA beneficiaries will live. Also, do not forget to have the names of your favorite charities in mind, as it is, after all, a charitable trust. If you would like to know more about integrating a Charitable Remainder Trust into your estate plan, please contact our office to schedule a design as a part of your trust review. We will also be holding a one-hour videoconference on this topic on October 6, 2020. See the sidebar to this article for details.