Recent legislative changes to laws impacting tax-advantaged retirement accounts like 401ks and IRAs have caused many prospective Florida retirees and estate planners to scramble for alternatives. Fortunately, the charitable remainder trust offers an off-ramp for some of the harsher aspects of a new federal retirement reform.
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, was signed into law with the stated purpose of helping Americans build more retirement assets. The thrust of the Act was to expand access to tax-qualified retirement accounts, and it includes beneficial items such as allowing IRA contributions without age restriction. The SECURE Act, however, has dramatically changed the estate landscape for those who may have planned to leave their tax-qualified retirement accounts as an inheritance to their loved ones.
Prior to the SECURE Act, beneficiaries could withdraw the assets of an inherited account over the course of their lifetime. This was known as “stretching” the annual required minimum distributions (RMD) of the account. It allowed for continued tax-deferred growth of money in the account, and reduced taxes for account beneficiaries due to the smaller annual RMD payments. As of January 1, 2020, though, the entire balance of an inherited IRA account will have to be liquidated within 10 years of the account owner’s death. The new 10-year RMD horizon means dramatically reduced asset growth and hefty annual tax bills for beneficiaries.
A charitable remainder trust could provide a solution. Instead of leaving a qualified retirement account to your family members as an inherited asset, an account holder could direct it to a charitable remainder trust. This involves selecting a charitable organization to receive trust assets, and an individual beneficiary who would receive an annual fixed percentage of the assets held in trust. The named beneficiary could receive the fixed percentage as income over a specified period of time, or even his or her lifetime, similar to pre-SECURE Act stretch payments. The chosen charitable organization would receive any remaining assets after the specified term or the beneficiary’s death.
Protecting your hard-earned retirement assets and supporting your loved ones upon your passing involves informed decision-making. We encourage you to contact an experienced estate planning attorney to learn more about charitable remainder trusts and the various ways the SECURE Act might benefit or harm your retirement savings.