The SECURE Act
Setting Every Community Up for Retirement Enhancement Act
● Signed into law on December 20, 2019 ● Effective January 1, 2020
Impact on Current IRA Owners
Increased the required beginning date (RBD) for required minimum distributions (RMDs) from 70 ½ to 72;
Repealed the maximum age for contributions to traditional IRAs;
Allows penalty-free withdrawals of $5,000 by each parent in the year of birth or adoption of a child.
How the SECURE Act Will Affect Your Heirs
Requires most non-spouse beneficiaries to withdraw inherited account balances within 10 years of the account owner’s death;
Exceptions for beneficiaries who are either:
a minor child of the account owner (until the child reaches the “age of majority”--18 in NC);
a disabled individual;
a chronically ill individual; or
an individual who is not more than 10 years younger than the account owner.
Note that the "minor child" exception applies only to the account owner's children. No other potential minors, such as grandchildren and nieces/nephews, benefit from this exception.
The 10-year payout period under the SECURE Act has substantially changed how value will be distributed to young beneficiaries and how rapidly the taxes have to be paid. Most trusts designed to receive IRA assets were established as "conduit" trusts.
With a conduit trust, the Trustee is directed to distribute to the beneficiary the smallest possible distribution (required minimum distribution or RMD) over the course of the beneficiary’s lifetime instead of allowing the beneficiary the option of liquidating the account immediately.
Under the old law, the RMD was determined using the beneficiary’s life expectancy. Therefore, a 25-year-old had a life expectancy factor of 58.2 years to distribute the account over, making the RMD each year very small. This is referred to as a “stretch” IRA. The beneficiary paid taxes on the RMD each year – but the tax payments were spread out over many years.
Under the SECURE Act, that same beneficiary, unless otherwise exempt, only has ten years to withdraw the entire balance, making the amount distributed each year much larger with substantial tax bills due with each distribution.
Opportunities for Nonprofits: the "Charitable Stretch."
The SECURE Act has provided a new and exciting opportunity for nonprofits!
There are several solutions that can reduce the amount of the tax due, when distributions from an IRA must be taken withing 10 years of the IRA owner's death. However, there is only one solution that actually mimics the lifetime stretch that the SECURE Act took away and, in addition, could substantially benefit nonprofit organizations. I call this solution the Charitable Stretch.
To understand how the Charitable Stretch works, you have to understand the basics of an estate planning technique called the Charitable Remainder Trust, or CRT for short.
A CRT is similar to a nonprofit organization in that the CRT doesn’t pay income tax as long as certain requirements are met. That means IRA assets transferred to a CRT on the IRA owner’s death do not incur any income tax, allowing the entire balance of the IRA account to continue to grow tax-free.
One of the requirements of the CRT is that a percentage of the value of the CRT must be distributed to at least 1 tax-paying beneficiary every year, beginning with a minimum of 5%. Those payments can be made over the lifetime of one or more beneficiaries. Similar to RMDs from an IRA account, the beneficiaries pay income tax only on the amount of the distribution they receive each year.
The CRT can be designed so that the annual amount received by the beneficiaries doesn’t change during lifetime, or, the CRT can be structured to payout more if the value of the CRT increases.
In addition to annual payments to individual beneficiaries, the CRT can be designed to make annual distributions to nonprofits, which are received by the nonprofits tax free.
When the last CRT beneficiary dies, all assets remaining in the CRT must go to one or more nonprofit organizations. The IRA owner who creates the CRT can reserve the right to change which nonprofits will receive the balance of the assets or can grant that authority to the other lifetime beneficiaries of the CRT.