Tax Planning Gem: Use a CRAT or CRUT to “Put Back” Your Stretch IRA Options for Non-spouse Beneficiaries
Many estate plans were built around the old “stretch IRA” rules that allowed beneficiaries to take withdrawals over their lifetimes. However, under the SECURE Act, most non-spouse beneficiaries must now withdraw the entire balance of an inherited IRA within 10 years of the original owner’s death.
While the 10% early withdrawal penalty does not apply to inherited IRA distributions, the withdrawals are still taxed as ordinary income. For many beneficiaries—especially children, partners, or other non-spouse heirs—this can mean taking large taxable distributions during their highest earning years.
In some cases, beneficiaries may also be required to take annual distributions during years one through nine if the original owner had already begun required minimum distributions (RMDs). Either way, the account must generally be fully emptied by the end of year ten.
A Strategy to Consider: Charitable Remainder Trusts (CRTs)
One planning strategy that may help address this issue is naming a Charitable Remainder Trust (CRT) as the beneficiary of the IRA instead of naming an individual directly.
When structured properly:
- The IRA proceeds pass to the CRT at death
- CRTs are generally exempt from income tax when receiving the IRA assets
- The trust then pays income to designated beneficiaries over time
Because the IRA distributes to the trust rather than directly to an individual, the 10-year payout rule does not dictate the timing of distributions to the beneficiary.
Example
Imagine John, a physician earning $300,000 per year, and his partner Ted, an attorney with similar income. Each has about $1 million in retirement accounts and plans to retire in about 10 years.
If John leaves his IRA directly to Ted, Ted must withdraw the account within 10 years—potentially adding large amounts of taxable income during his peak earning years.
If instead the IRA names a properly designed Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) as the beneficiary, the IRA proceeds pass to the trust. The trust can then limit distributions during Ted’s high-income working years and potentially distribute more income later when he retires and may be in a lower tax bracket.
The Trade-Off
CRTs do require a charitable component. At least 10% of the trust’s initial value must ultimately pass to charity. For individuals who are charitably inclined, this structure can allow them to:
- Provide long-term income to beneficiaries
- Potentially reduce the tax impact of inherited retirement accounts
- Leave a meaningful charitable legacy
The Bottom Line
The SECURE Act dramatically changed how inherited IRAs work for most non-spouse beneficiaries. If the loss of the traditional “stretch IRA” affects your estate planning goals, charitable remainder trusts may provide a potential workaround worth exploring. As always, these strategies require careful planning and should be discussed with qualified tax and estate planning professionals.