With tax season upon us, it occurs to me that spring cleaning should sometimes go beyond the house. Sometimes you may need to re-evaluate your family's financial security. Do you have enough in an emergency savings account, and are your retirement savings on track? Have you reviewed the asset allocation of your investments? Have you designated written beneficiaries for your 401k or IRAs? Would you like to know how to integrate your philanthropic outreach with your financial planning?
As a way to integrate your philanthropic outreach with financial planning, you may want to check out the changes of the Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act. Most of the legislation for the Act went into effect on January 1, 2020. The SECURE Act significantly impacts the long-term benefits of a non-spousal inherited IRA. With few exceptions, under the recent SECURE Act, an IRA beneficiary who is not the owner's spouse must now withdraw all funds from an inherited IRA within ten years. In other words, the inherited IRA that was able to grow tax-free for many years is currently limited to just ten years.
The SECURE Act requires a non-spousal heir (typically, a child) to withdraw all the assets from the inherited IRA account within ten years. It also eliminates the common practice of spreading distributions over the child's life expectancy, not just ten years. For example, under the previous rules, if a 21-year-old grandchild inherited an IRA, the child could spread the payments over the child's life expectancy of 60 years or more! The SECURE ACT eliminated these significant "stretch IRA" advantages.
So, what can you do in relatively simple terms? One option is designating a Charitable Remainder Trust (CRT) as the designated beneficiary of the IRA with the "stretch payments" from the beneficiary CRT distributed to your children or grandchildren. Also, your donor-advised fund (DAF) is designated as the remainder-recipient of the CRT.
Pictures always help! Let me explain the diagram. It shows the CRT as the tax-free beneficiary of the IRA. The CRT then distributes a fixed percentage or amount from the CRT to one or more beneficiaries for life or less than 20 years. As the name implies, CRT, the remainder of the assets, will be passed to the designated DAF. You establish the DAF, which is advised by your family with your written donor letter of intent. By the way, this is an excellent time to start one of those meaningful conversations I often refer to in blogs in the soon-to-be-released learning program. Also, this strategy will be covered in detail in the Aspirational Philanthropist Learning Program; a 4-course online, donor-focused, learning program that will be released later this year through Auburn University’s Cary Center for the Advancement of Philanthropy and Nonprofit Studies. Stay tuned!
Other advantages to CRTs include the tax-free receipt from the IRA and a regular payout from the trust assets to the individual beneficiaries. With the CRT, the amount of the charity's remainder interest must be at least 10% of the trust's value at its inception. The IRA proceeds are not taxable to the charitable remainder trust or death, not taxable within the charitable remainder trust. Distributions to members of your family may be "stretched" over 20 years or a specific term. After the period, the remaining assets are distributed to the DAF.
Below is a brief overview of the benefits of a CRT and DAF pairing:
- The assets in your IRA pass tax-free to the CRT as the IRA's designated beneficiary.
- The CRT allows stretch payments to the family for more than ten years.
- It engages family and perpetrates shared family values through grant funding to nonprofits..
- It continues the tax deferral of funds in the CRT.
- It minimizes the tax burden on family members receiving periodic CRT distributions.
- Of course, this alternative requires planning, meaningful conversation with loved ones, some expense, and retaining an estate planning attorney to draw up the CRT.
If you have a sizable IRA with an intent to integrate family financial security with family values, this may be a viable option for you.
So, let's do some good for both your family and favorite nonprofits!