Marketing Package Now Available
Crescendo has just released a new SECURE Act marketing package. The package focuses on the testamentary charitable remainder unitrust (TCRUT) as the solution to the IRA beneficiary inheritance problem created by the SECURE Act.
The SECURE Act requires the distribution of beneficiary inherited IRAs within 10 years of the IRA owner's death, effectively eliminating stretch-IRAs for most beneficiaries. This means that IRA beneficiaries will receive larger amounts distributed over a shorter period of time and pay higher taxes on their inheritance.
When a testamentary charitable remainder unitrust is funded with an IRA it can make payments to children for life or up to 20 years. The marketing package highlights the new attractiveness of TCRUTs to your donors who wish to benefit their children with an IRA inheritance and don't want to be limited by the SECURE Act rules.
The package includes an eblast, postcard and brochure. Contact us for more information.
SECURE Act Promotes IRAs to Testamentary Unitrust Plans
Expect a dramatic increase in IRAs to Testamentary Unitrusts. The SECURE Act repeals the stretch IRA beneficiary payouts and changes the time from life expectancy to 10 years. What plan could replace the former stretch IRA distribution? Could a plan combine the tax-saving benefits of a stretch IRA with a term-of-years or life payout to children or other heirs? Could this plan also have the tax-free growth benefit of a stretch IRA? While it sounds too good to be true, the IRA to testamentary unitrust plan includes all of these benefits. During 2020, there will be a boom market in planning for qualified retirement plans to testamentary unitrusts.
On December 19, 2019, the Senate passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act includes many provisions designed to facilitate and enhance saving for retirement:
- Traditional IRA Contributions - Individuals over age 70½ with earned income may continue to make contributions each year.
- Required Minimum Distribution (RMD) Age - For individuals who turn 70½ after December 31, 2019, the RMD age of 70½ is increased to age 72. Many loyal donors may choose to increase their IRA rollover gifts after age 72.
- Retirement Plan Annuities - The rules are generally expanded to permit more qualified retirement plans to offer annuity payout options.
- Stretch Distribution Reduced - Inherited IRAs for nonspouse beneficiaries will no longer be distributed over life expectancy, but IRA and other qualified plans of decedents must be paid out over a maximum term of 10 years. There are exceptions for recipients with disabilities, minors and individuals who are within 10 years of the age of the IRA owner.
- IRA Rollover Limit Potentially Reduced - If an individual makes contributions to a traditional IRA after age 70½, the $100,000 per year qualified charitable distribution (QCD) limit is reduced by the amount of IRA contributions after that age. It is probable that most donors either will not have earned income after age 70½, will have total income over the IRA phaseout limits (and may not fund an IRA) or may choose to make Roth IRA contributions.
Dramatic Increase in IRA Transfers to Testamentary Unitrusts
The SECURE Act reduces future taxes for IRA owners by increasing the age for required minimum distributions (RMDs) from 70½ to 72. However, to pay for the cost of increasing the RMD age, taxes paid by future nonspouse IRA beneficiaries (typically children) will increase.
For individuals who passed away in 2019, an IRA beneficiary was able to "stretch" an IRA payout over life expectancy. A child designated beneficiary may have stretched the tax-free growth and IRA payouts over 30 or 40 years. However, if a traditional IRA owner passes away in 2020, the beneficiary generally must take all distributions within ten years. With a ten-year payout, the income taxes paid by the beneficiary will be substantially higher than the prior "stretch" plan.
What is the best solution? Could a plan combine the tax-saving benefits of a stretch IRA with a term-of-years or life payout to children or other heirs? Could this plan also have the tax-free growth benefit of a stretch IRA?
The IRA to testamentary unitrust plan includes all of these benefits. A single person or surviving spouse may create an unfunded lifetime unitrust or testamentary unitrust in a will or living trust. The IRA beneficiary designation is made to the trustee of that unitrust. When the IRA owner passes away, the unitrust is funded with the traditional IRA. Because the unitrust is tax-exempt, there is a bypass of the income tax on the traditional IRA and any future growth.
Parents Desire to Protect "creative spender" Children
Some couples have several children. If one child is a "creative spender," a wise parent may set up a trust. Without the protection of a trust, this child may take the full IRA payout, send a huge tax payment to the IRS and quickly spend the balance. Because many parents have a "creative spender" child, transferring the IRA to a testamentary unitrust is prudent planning. The unitrust benefits the child through tax-free growth and larger total payouts over the trust duration. This unitrust has many excellent tax benefits, especially when compared with the SECURE Act mandatory payout over ten years.
IRA to a Unitrust for Children
A unitrust pays 5% or more for a life, lives or a term of 20 years. There are two basic options for transferring an IRA to a unitrust for children or other family members. One option is to transfer the IRA to a term of years unitrust for the children. For IRA owners with large accounts, a second option is to transfer the IRA to a unitrust that will pay each child for his or her lifetime.
While the unitrust may be a testamentary trust in either a will or a living trust, it is easier to create an unfunded unitrust document for the life of the IRA owner plus a term of years and then change the IRA beneficiary designation to the trustee of that trust. The living unitrust may be unfunded in some states (California and others) or it may require nominal funding but no administration. Check the applicable state law for funding requirements.
Give It Twice Trust
A popular option is a "Give It Twice" trust. This trust is commonly funded with an IRA or other taxable retirement plan. In this plan, a substantial portion of the estate of the surviving spouse is transferred outright to children. The IRA is the balance of the estate. It is transferred at death of the surviving spouse to a term of years unitrust. Since the unitrust is tax exempt, no income tax is paid when the IRA is distributed to the trust. The full IRA value is invested and pays 5% income to children for a term of 20 years.
The 5% income to children is taxable, but over 20 years approximately equals the initial IRA balance. At the end of the term of years, the trust is distributed to charity. This "Give It Twice" unitrust transfers the value once to family as income and then a second time to charity.
The IRA limits on distributions under the SECURE Act greatly reduce the stretch payout plans for children. The desire of parents to protect "creative spender" children requires a positive solution. Transfer of an IRA or retirement plan to a testamentary unitrust combines tax-free growth, maximum income, protection of the trust principal and a future generous gift to charity. For thousands of parents and individuals who desire to protect and help other family members, the retirement plan to testamentary unitrust solution has enormous benefits for family and charity.
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