Do I Need a Charitable Remainder Trust?

The end of the stretch IRA caused problems and questions for many people who had been using this popular estate planning tool. The stretch IRA was often used to pass on a financial legacy to heirs in a tax efficient way by allowing those beneficiaries to withdraw funds only at minimum distributions every year. This means that that tax deferred growth had the potential to turn into substantial inherited retirement funds over the course of their lifetimes for younger beneficiaries.

However, the SECURE Act passed in 2019 marked the conclusion of the stretch IRA for account holders who passed away after December 31, 2019. However, there is one small exception for certain beneficiaries. Instead of having to withdraw all of the funds inside these IRAs by the end of a decade, as is now the requirement under the SECURE Act, eligible designated beneficiaries can use their own life expectancy numbers to calculate the amount that will be taken out annually.

Specific requirements must be met for eligible designated beneficiaries, including:

  • Non-spouse beneficiaries who are no more than 10 years younger than the individual who passed away.
  • Legally adopted or biological children of the deceased until they hit age 21, at which point the 10-year depletion rule applies.
  • Beneficiaries who are chronically ill or disabled.

If you do not fit into these categories, you may be required to withdraw the funds in an inherited IRA by the end of 10 years after the account owner passes away. Using a charitable remainder trust may be one way to tap into some of the benefits of the previous version of the stretch IRA. This setup offers a blend of tax benefits and charitable giving.

You would name a charitable remainder trust as your IRA beneficiary. At the time of your death, the assets would pass to the CRT, which is a tax-exempt entity and those assets would be allowed to grow tax deferred. Over a specified term, beneficiaries of the charitable remainder trust would receive income distributions and any remaining funds at the conclusion of that term will go to a charitable beneficiary. Speaking with a qualified Pasadena estate planning attorney is the best way to determine if this is a good fit for you and your individual estate plan goals.

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