The IRA "Stretch Plus" Strategy
Oct 21, 2024
While many were praising the SECURE Act and its changes in the past few years, there was one incredible tax opportunity for beneficiaries that was stripped away. Before the new legislation was enacted, there was the potential for a pay-on-death beneficiary of an IRA or other retirement account to spread the withdrawals over their lifetime through an Inherited IRA, therefore lowering the income tax rate and allowing for more tax-deferred compounding. In fact, the distributions were taken over an average of 26.5 years before the SECURE Act limited it to 10 years in most circumstances.
But, as with many things within the field of estate planning, there are loopholes and alternatives available. At a recent national estate planning conference called The Advanced Institute by The Estate Planning Source, I presented the concept and general process of using a Testamentary Charitable Remainder Trust to wash away some of the taxes and stretch the tax-deferred inheritance over many more years... even a beneficiary's lifetime. When you imagine a beneficiary inheriting $1.3 million from an IRA and having to take about $130,000 in distributions per year over a decade and dumping it on top of their usual income on their 1040 tax return, you can imagine how much is wasted in taxes. And then the payments stop. If instead that could be transformed into between $70,000 and $100,000 per year over a forty year period which was only partially income taxable because of the charity's status. In the end, the beneficiary could receive almost $3.5 million in payments and net more than $2.3 million after taxes. In addition for this example, the charity also gets almost $2.3 million at the end. (This is just one illustration, and every situation should be reviewed by a tax professional before jumping into this strategy).
Here's the general process outline for the IRA Stretch Plus Strategy:
1) Review your specific situation with a competent estate attorney, financial advisor, and tax professional;
2) Establish a Charitable Remainder Trust with payment amount/interest rate, number of years of payments, beneficiary names, the identified charity or charities, and other terms based on input from the three professionals;
3) Change the beneficiary on the chosen retirement account(s) to be the charitable remainder trust;
4) If ongoing protection is needed for a beneficiary, then IRA Trusts or other protective trusts could be the named beneficiary from the Charitable Remainder Trust, and those trusts can be drafted for the protection and use of the beneficiaries.
The first step is the most important because the amount or rate of interest and number of years determined up front will also calculate how much the charity will receive at the end, and therefore what kinds of tax breaks are available.
Over the years, I have worked with clients on establishing and funding Charitable Remainder Trusts with transfers during life to help leverage the charity's 501(c)(3) status to wash away capital gains and other taxes, but the same technique can be utilized through the IRA Stretch Plus Strategy after death for retirement accounts. A recording of my presentation at The Advanced Institute will be released on the YouTube Channel in the coming weeks, and you can learn more about how supporting charities can also lower your tax bill in my video 8 Ways to Save Money Gifting to Charities.
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