When the SECURE Act was first proposed in mid-2019, what seemed to be the most troubling feature to me was the elimination of the stretch provisions for anyone other than a surviving spouse. At that time, I started to consider what viable alternative there would be as potential replacements for the stretch. Normally, I don’t waste much time on tax proposals since they seldom pass as proposed but there was very solid information that this bill would make it into law. And it did, effective on January 1, 2020.
The same questions still exist for taxpayers. What now? Now that I can’t use a stretch IRA for my children to receive my IRA funds, how can I control the rate at which they receive their inheritance and reduce the tax that will increase because ten years of distributions is going to force them into higher tax brackets.
There have already been numerous webinars by national experts explaining the new rules and the nuances of those rules. Little, though, has been said about potential solutions. One solution that has been mentioned briefly is a testamentary transfer to a Charitable Remainder Trust (CRT). This is a worthwhile consideration. CRTs are tax exempt trusts, therefore the transfer of IRA or other qualified funds to a CRT will not trigger the recognition of income. Structuring the CRT will depend on the ages of the heirs at the time of death of the IRA owner since the CRT will have to qualify for the 10% remainder test with a minimum payout of 5%. Younger beneficiaries may not qualify for a lifetime CRT but a term of years (not to exceed twenty) trust could be a viable substitute. Still a twenty-year stretch is better than ten for deferring tax. Pity the poor attorney who has to draft these instruments with all of the possible variables.
One solution that WILL NOT WORK is a rollover to a Pooled Income Fund (PIF). Even though PIFs are charitable trusts, unlike the CRT, they are not tax exempt. Instead, the PIF trust is a complex trust. It is not taxed because it pays out all of its income. Further, regulations permit the realization of long-term capital gains that are undistributed to be added to principal. Because the trust is taxable, a rollover from an IRA would be a deemed distribution and become immediately taxable. Further the PIF would have to consider the receipt of those IRA assets as income to the PIF and they would be required to be distributed to the income beneficiaries. Not a good result.
There are other alternatives to the stretch IRA that provide significantly better results than the CRT rollover but the purpose of this piece is to hammer home the fact that a PIF is not an option.
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