At CICF’s Professional Advisor Fall Seminar, Christopher Hoyt presented on the topic, Retirement Accounts: The End of the Inherited Stretch IRA: Now What? Read below to learn about planning implications and strategies.
secure act dilemma
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) radically changed the timing and amount of taxation on inherited IRA accounts in the hands of non-eligible beneficiaries commencing January 1, 2020. Eligible beneficiaries include, generally, surviving spouse of IRA owner, chronically ill or disabled beneficiaries and beneficiaries less than 10 years younger than the IRA owner. For all other IRA beneficiaries, the SECURE Act requires withdraw of the balance of the account within 10 years after the death of the original account owner, thus putting the kibosh on the stretch IRA strategy. While charitably minded IRA owners often designate a charity (or charitable fund, such as a donor advised fund) as the beneficiary of the balance of an IRA at the owner’s death, thereby eliminating all tax due on the IRA, this approach does not provide any income for the decedent’s children or grandchildren. For charitable clients who want to benefit heirs as well as charity, testamentary charitable remainder trusts (CRTs) and charitable gift annuities (CGAs) may provide attractive solutions. Both options provide income for heirs and effectively get the “stretch” back, extending the tax liability associated with the IRA income over the income beneficiary term of the CRT or life of the CGA annuitant
tESTAMENTARY CRT SOLUTION
Professor Hoyt likened the use of a testamentary charitable remainder trust and its tax advantages to moving IRD tax-free after death from one tax exempt trust, i.e., the IRA, to another tax-exempt trust, the CRT, and cited PLR 199901023. This results in no taxable income to income beneficiaries until they receive distributions from the CRT, which can be over their lifetime, or a term or years (with the maximum term of twenty years). Voila! The return of the stretch! The income beneficiaries could be grandchildren or the CRT could be a two-life CRT paying, e.g., 5% to surviving spouse for life, then 5% to children for life, with remainder to charity. Hoyt included scenarios in which 40 to 50 year CRUTs with high income tax paying beneficiaries could produce more family wealth than the ten year IRA liquidation now required by the SECURE Act, but cautioned, as would CICF, that using a CRT as a “solution” to gain back the IRA “stretch” is suitable only for otherwise charitably minded clients who also desire to benefit family. Additionally, there are upfront costs and hurdles to using a charitable remainder trust, including the creation of the trust and trust agreement so the trust can be named the beneficiary of the IRA with the IRA custodian. Moreover, the trust will require trustee/s, investment advisor/s and tax accountant(s) once it goes into effect, making it effective perhaps only for IRAs with more significant value.
TESTAMENTARY CGA SOLUTION
An alternative to using a CRT as the beneficiary designation for an IRA is the testamentary charitable gift annuity (CGA), which can be used to guarantee fixed income for life to the IRA owner’s heirs, with the remainder (residuum) to charity. The testamentary CGA is simpler than the trust arrangement involved with a CRT. The CGA is a contractual agreement with a charity such as CICF, in which CICF agrees to provide an annuity income for the life or lives of one or two (maximum) people in exchange for a lump sum contribution to the charity up-front. Any excess funds after the death of the annuitant/s go to the charity. In the case of CICF, the excess funds can go into any of our charitable fund types, including a donor advised fund, scholarship fund, designated endowment fund to support a specific charity or to support CICF’s mission and initiatives. The income payments to the annuitants are determined based on their age and the recommended rates published by the American Council on Gift Annuities, an independent not-for-profit that provides guidance for gift annuity administration by public charities.
With much lower administrative costs than a CRT (there is no separate trust or trustee; no separate tax return, etc.), Professor Hoyt pointed out that a CGA is economically feasible for smaller IRAs. However, many charities will not issue CGAs for individuals under age 65 or deferred CGAs for individuals under age 60. According to Hoyt, annuity payments to the annuitants under a testamentary CGA should be taxed to them as annuity income (with the possibility yet to be officially determined that the portion of the annuity income attributable to the IRD might be exempt from the 3.8% surtax that generally applies to annuity income received by upper income taxpayers.) Similar to using a CRT, taxable distributions to CGA annuitants from the “inherited IRA” are spread out over the beneficiary’s lifetime rather than compressed into a ten year period.
Although there is limited authority currently regarding funding a CGA with a testamentary transfer from an IRA, Hoyt expects legal outcomes to become better substantiated quickly and that the testamentary CGA will prove a simple solution to IRA account holders post SECURE Act. A simple beneficiary destination change on the IRA account is all that is required to transfer the funds to the charity at the IRA owner’s death. The charity and donor also will execute an annuity agreement contingent on that designation remaining in place.
CAUTIONARY NOTE REGARDING QCDs and MAKING TAX DEDUCTIBLE CONTRIBUTIONS into an IRA after AGE 70 ½
Professor Hoyt began his presentation with this SECURE Act ringer: If your clients EVER want to make a charitable gift (qualified charitable distribution/ “QCD”) from their IRAs as all or part of their RMD , then they should NEVER make a tax-deductible contribution into their IRA after attaining age 70 ½, even though the SECURE Act permits working individuals to make tax deductible contributions to their IRA (up to $7,000 in 2020 for taxpayers with income less than $75,000/$124,000 per couple). Any tax deductible contribution INTO an IRA after age 70 ½ will be netted from ALL QCDs over the remaining lifetime of the account holder. According to Professor Hoyt, “people in their 80s and 90s will need to keep all tax records after age 70 ½ and then make cumulative computations.”
If you have questions about testamentary CRTs, testamentary GCAs, naming a charity the beneficiary of a retirement plan or any other charitable gift planning questions we can help you with, please feel free to give us a call. We are here to help, whether your questions relate to a potential gift to CICF or not.
Mary Stanley, JD, CAP
Senior Director & Legal Counsel for Charitable Gift Planning
MaryS@cicf.org
317.431.4417
Sarah Weaver, JD
Senior Gift Planning Advisor & Assistant Legal Counsel
SarahW@cicf.org
615.513.3897
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