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. In other words, whereas some beneficiaries may have once been able to distribute their inherited retirement accounts over many decades, such distributions must now often be made in a much shorter amount of time (10 years).
As a response to this 10-Year Rule, many advisors have contemplated an increase in the use of Charitable Remainder Trusts (in particular, the Charitable Reminder UniTrust, or CRUT). A CRUT is a trust that distributes assets annually in a ‘Stretch’-like manner over one or more individual's life expectancies, then terminates and sends the remainder to a charity. This can allow certain beneficiaries to experience some of the same benefits that they did under the ‘old’ ‘Stretch’ rules, including tax-deferred growth.
But CRUTs must follow a number of rules, which can ultimately limit their effectiveness as a wealth transfer vehicle. For example, at least 10% of the present value of assets contributed to the trust must pass to a qualifying charity when the trust terminates —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. Together, these requirements make it impossible for a CRUT with lifetime payments to be established for certain young beneficiaries (generally those in their mid-20s or lower.
At the same time, other beneficiaries may be too old to receive the true benefits of CRUT payments if their life expectancy is too short to truly benefit from the tax deferral offered by using a CRUT. No tax deferral is gained when a CRUT is distributed in under a decade, because the 10-Year Rule already offers tax deferral for that time period. In fact, it often takes 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 some, the ultimate trade-off risk of heirs losing a little, and a charity gaining a lot, is well worth their while!