In December 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was passed into law, bringing with it substantial changes to the laws governing retirement accounts. Of the changes, perhaps the most discussed were the revisions to the post-death distribution rules, which eliminated the ‘stretch’ provision for most non-spouse designated beneficiaries of retirement accounts. As a result, many beneficiaries are now required to distribute inherited account(s) within 10 years after the year of the owner’s death or face a 50% penalty applied to the shortfall. In other words, what some beneficiaries may have once stretched for decades is now only available for a short amount of time.
As a response to this 10-Year Rule, many advisors have turned to Charitable Remainder Trusts (in particular, the Charitable Reminder UniTrust, or CRUT). A CRUT is a trust that can distribute assets annually in a ‘Stretch’-like manner over one or many individuals’ life expectancies, then terminates and sends the remainder to a charity. On one hand, this allows individuals to experience many of the same benefits that they did under the ‘old’ ‘Stretch’ rules, including tax deferral and income tax exemptions.
However, the conditions which create a CRUT can also have substantive downsides. For example, at least 10% of the value of the trust at inception will need to be donated when the trust expires—in other words, upon the heir’s (or heirs’) death(s). At the same time, a CRUT is required to distribute 5–50% of its assets to beneficiaries annually. These two requirements mean that many beneficiaries are either too old to receive the true benefits of CRUT payments, if their life expectancy is under a decade, or too young to be eligible, since they will likely outlive the CRUT payments. In either scenario, a premature death results in a substantial reduction in generational wealth transfer. Significant tax deferrals are not gained when a CRUT is distributed in under a decade rather than via the 10-Year Rule. In fact, it can take over three decades of CRUT distributions for its tax deferral to make up for the amount that is ‘lost’ to the charity upon a beneficiary’s death—and that is without considering additional complications, such as organizational and operational expenses and the loss of optionality.
Ultimately, for those who wish to use a CRUT solely to maximize the transfer of wealth to heirs, the bottom line is that a CRUT is generally a ‘risky’ option. With all of that said, for those who want to use CRUTs to both help beneficiaries and satisfy a charitable inclination, a CRUT is an option worth exploring. For many, the ultimate trade-off risk of heirs losing a little, and a charity gaining a lot, is well worth their while.