One of the biggest changes under the Secure Act was the elimination of the stretch IRA approach utilized by many high net worth clients. The new law allows a surviving spouse as well as minors and some disabled persons to take benefits over their lifetimes while all other individuals must withdraw the balance of the IRA within ten years. Many clients have expressed concern with this change and a desire for alternative approaches for their qualified plan assets.
The charitable remainder trust presents a useful way to allow a person to take distributions over their lifetime instead of the new ten year limit. The trust will need to meet the requirement that the charity will receive at least ten percent of the total trust value and, of course, the distributions to the beneficiary will be taxable income. For clients with charitable intent and beneficiaries no longer able to benefit from the stretch, the trust can make a big difference in the timing and rate of taxes while keeping the estate plan effective. Since the charitable trust rules are more complicated than we can cover here, it is important to consult with a tax and estate planning professional to make sure the trust will accomplish your goals.
A conduit trust – which must pass to its beneficiary all distributions received from an IRA – is another approach. When the beneficiary is an eligible designated beneficiary such as a surviving spouse, the distributions may be made over the beneficiary’s lifetime and won’t have to be fully distributed in ten years. However, if the only permitted distributions from the trust are RMDs from an IRA, a problem arises since the only RMD under the new law is the one occurring at the end of the ten year period. This means the trust language must not be limited to distribution of RMDs but instead should permit any distributions from that IRA.
Careful planning is essential under the SECURE Act and you should consult with a tax professional before finalizing any trust or other planning.