by Laurie Valentine, JD, Senior Counsel, Philanthropic Giving
Many financial advisors remember when clients who inherited an IRA could stretch required withdrawals over their lifetimes, minimizing the annual income tax burden. That option changed with the SECURE Act of 2019. Now, most non-spouse beneficiaries must withdraw the entire inherited IRA within 10 years, often accelerating income tax consequences in years when beneficiaries are in their highest earning bracket.
For a small group of clients, however, there may be an alternative worth considering.
When a Charitable Remainder Trust Might Make Sense
A charitable remainder trust (CRT) may be a fit when all of the following are true:
- Your client owns an IRA.
- Charitable giving is already a meaningful part of their estate plan even when the client has children or other heirs.
- Your client has identified a young, healthy heir to whom the client would like to leave a legacy gift.
- This heir is likely to be in a high-income tax bracket in the years ahead and wants to defer income tax wherever possible.
Here is the basic idea, simplified:
- Instead of naming the heir directly as the beneficiary of the IRA, your client would name as beneficiary a charitable remainder unitrust, referred to as a CRT, or even a “NIMCRUT” (net-income make up charitable remainder unitrust), of which the heir is the income beneficiary.
- At the time the client passes away, the CRT would then receive the IRA proceeds.
- Because a CRT is a tax-exempt entity, it does not pay income tax when the IRA assets are distributed to the trust.
- According to the terms of the CRT, the assets can be distributed annually over the heir’s lifetime (or for a fixed period of up to 20 years) and the heir will pay income taxes on distributions from the trust as they are received.
Why This Strategy Is Not for Everyone
There are important limitations to consider:
- The IRS requires that a CRT’s pay-out rate result in a present value of the future gift to charity of at least 10% of the value of the initial gift. With a very young beneficiary, the payout rate may have to be set so low that the structure is not practical.
- If the heir's life ends earlier than expected, the remaining trust assets go directly to charity, reducing what might ultimately pass to the heir’s own beneficiaries.
- Even with tax advantages, it may take many years for the CRT strategy to outperform simply leaving other, stepped-up-basis-eligible assets to heirs and leaving IRA accounts directly to charity.
Bottom Line
If your client is charitably inclined, they may be better able to fulfill their charitable goals by naming a charity, such as the client’s fund at Community Foundation Tampa Bay, as the beneficiary of the client’s IRA, leaving other assets eligible for the step-up in basis to fund the estate gifts for heirs.
We Are Here to Help
To explore whether this strategy or another charitable option might be right for your clients, please reach out to Community Foundation Tampa Bay. We are honored to be a trusted partner in helping you guide clients toward meaningful and tax-smart philanthropy.
Laurie Valentine, JD, Senior Counsel of Philanthropic Giving at Community Foundation Tampa Bay, has served as part of the staff since 2022. With expertise in charitable giving, estate planning, and nonprofit law, she helps professional advisors, philanthropically minded individuals, and families navigate and create impactful legacies in Tampa Bay. She can be reached by phone at (813) 692-1880 or via email at lvalentine@cftampabay.org.
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