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The Elimination of the Stretch IRA and Use of a Charitable Remainder Trust

The Elimination of the Stretch IRA and Use of a Charitable Remainder Trust

December now feels like ancient history given the current state of the world, but back then, Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement) which introduced  significant changes to many retirement-related plans, including the rules governing the inheritance of qualified plans and individual retirement accounts (IRAs). Specifically, the new rules end the Stretch IRA for many beneficiaries; but there are still worthwhile planning opportunities to consider, especially for those with philanthropic intent.

If one’s adult children are designated as beneficiaries of an IRA, they will no longer be able to stretch out the stream of annual distributions over the course of their remaining lifetime. Instead, such beneficiaries of IRAs must now deplete the IRA by the end of the 10th year following the year of IRA owner’s death.

However, the lifetime ‘stretch’ benefit is still available for a number of “Eligible Designated Beneficiaries” including the following:

  • Surviving spouse
  • Disabled person
  • Chronically ill person
  • Individuals within 10 years of the deceased retirement account owner’s age
  • Minor child of the decedent

An important element in this type of wealth transfer is highlighted by a fairly common consideration—whether to receive an amount of money as either a lump sum or as a stream of payments. Think of the retiree making decisions about pension payout choices or the lottery winner deciding on a payout strategy. This new, recent legislative ruling puts an end to the regular practice of stretching out an inherited IRA over the lifetime of perhaps the most common beneficiary—an adult child.

Current circumstances further underscore the importance of this new limitation. Say an adult child is in the 10th year of an inherited IRA, and hence they are now required to withdraw every remaining penny from the account. If this situation occurs during a difficult market period similar to what we are presently experiencing, selling securities before making the final required withdrawal could cause extra harm as they could be left with significantly less value than what had been planned to meet longer-term needs. To avoid this potentially permanent damage, IRA assets are not required to be liquidated prior to a distribution, and instead may be transferred in-kind to a taxable account as an alternative.

Depending upon the overall resources of one’s children, and given these more restrictive retirement plan rules, there might be other ways to create a lifetime income stream from these same retirement assets when one dies. If one is philanthropically inclined, one option to consider is the use of a Charitable Remainder Trust (CRT). A CRT is an irrevocable trust that generates an income stream for another person (and up to four different recipients) and yet it still leaves a remaining balance to go to a desired designated charity. To accomplish this outcome, the CRT must be established as the beneficiary of the original IRA owner.

The fixed annuity payment to the beneficiary must be set at an annual percentage of at least 5% and it can be no more than 50% (which is highly unusual) of the fair market value of the assets in the corpus.1 The remaining value, ultimately intended to go to charity, must be at least 10% of the fair market value of the assets initially contributed to the CRT.2 Each year, on the applicable valuation date, the annual income distribution (for example, that 5% payout) is calculated based on the account value, and it is then sent out to the income beneficiary; and this process continues for either the designated set period of years or the recipient’s lifetime.

A CRT can also be directly established using taxable assets during one’s life, for similar income and philanthropic objectives; and this can be an effective estate planning strategy as well. Your Wealth Manager, tax advisor and estate planning attorney can work together to create this solution for your family.


1, 2 – www.irs.gov

Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.  
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