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How your beneficiary can stretch your IRA post SECURE Act

How your beneficiary can stretch your IRA post SECURE Act

February 11, 2020

The SECURE Act changed post-death required minimum distribution (RMD) rules, eliminating the “stretch-IRA” for most beneficiaries. The new rule instead requires most beneficiaries to liquidate and pay tax on the entire IRA by the end of the 10th year following the year of death of the IRA owner.

This means, for example, that if an IRA owner dies in 2021 leaving his $2 million IRA to his 45-year-old daughter she will have to pay tax on that entire IRA by the end of 2031, rather than potentially stretching it out over a 40-year life expectancy under the old rules. This tax acceleration may be very expensive to the beneficiary, who very likely will be in her peak earning years in the 10 years following her father’s death.  It may be possible to use a charitable remainder trust, as IRA beneficiary, to replace the foregone stretch payments with an “income for life” to the beneficiary.

Using the example from above, under this planning option, the IRA owner will establish a CRT naming his daughter as the income beneficiary of the trust. The IRA owner will then name the CRT as beneficiary of the IRA. At the IRA owner’s death, the IRA will be paid into the CRT, which is a tax-exempt entity.   The CRT will liquidate the IRA inside the trust and make payments to the daughter, as income beneficiary, for her lifetime.  At her death, anything remaining in the trust will go to the charitable remainder beneficiary.

For the charitably inclined, this can be an attractive option