The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, was approved by the Senate on Dec.19, 2019, as part of an end-of-year appropriations act and accompanying tax measure. It was then signed into law by President Donald Trump on Dec. 20th.
Under the SECURE ACT, qualified plan and IRA benefits generally have to be distributed within ten years of the IRA owner’s death. However, employees and IRA owners may replicate the stretch by using charitable remainder unitrusts (“CRUTs”) for certain beneficiaries. The typical design for a CRUT would be to distribute a percentage, most often 5%, of the value of the assets to the CRUT to one or more individual beneficiaries for their lifetime, though the length of a CRUT could be limited to 20 years. At the end of the CRUT, any remaining assets must be paid to charity, whereupon the trust ends and the balance of the assets goes to charity.
While the percentage must be at least 5%, but not more than 50%, and while the payments could be fixed based upon the value of the trust at inception, due to current federal interest rates and regulations (which require, among other things, actuarial value of the charity’s remainder interest must be worth at least 10% of the value of the trust as of the inception), the most likely percentage is 5% and the actual payments may vary each year depending on the value of the CRUT.
The payments will normally be taxable as ordinary income to the beneficiary of the CRUT; however, at some point, the payments may be taxed at the more favorable rates for dividends and capital gains. Since a CRUT is tax-exempt, it may take the qualified plan and IRA benefits in a lump sum without any income tax payments. The result is similar to that of a stretch IRA, where the income tax is differed over the lifetime of the beneficiary. The exact design of the CRUT is dependent on the age of the beneficiary and the then-current federal interest rate.
We strongly recommend that clients touch base with us to determine if/how the new SECURE ACT will impact their retirement and estate planning. Don’t hesitate! Contact us to schedule an appointment as soon as possible!