Pub. 3 2021 Issue 4

J U L Y / A U G U S T 2 0 2 1 12 nebraska cpas C O U N S E L O R ’ S C O R N E R THE FAUX STRETCH IRA WITH A CHARITABLE TWIST CONTRIBUTIONS OF RETIREMENT BENEFITS TO THE CHARITABLE REMAINDER TRUST BY CRAIG BENSON AND NICK O’BRIEN, KOLEY JESSEN The Setting Every Community Up for Retirement Enhancement (SECURE) Act limited the availability of “stretch IRAs” to few potential beneficiaries. 1 Now, most beneficiaries who inherit an individual retirement account (IRA) 2 must withdraw the assets within 10 years. 3 Notwithstanding, a faux stretch IRA can be achieved by contributing an IRA to a Charitable Remainder Trust (CRT). Charitable Remainder Trusts. ACharitable Remainder Trust is an irrevocable split-interest trust whereby non-charitable beneficiaries receive income during life with the remainder passing to charity. 4 The value of the charitable remainder interest must be 10% or more of the actuarial value of the assets initially contributed. 5 The trustee is required to make annual distributions to non-charitable beneficiaries of at least 5% and no more than 50% of the initial fair market value of the contributed property until the death of the last surviving non-charitable beneficiary, or, if a specific term is elected, no more than 20 years. 6 Upon contribution, the donor is allowed a charitable deduction equal to the present value of the remainder interest. 7 CRTs are income tax exempt, allowing the sale of assets within the CRT without triggering tax. 8 The tax is not eliminated, but rather deferred until distributed to the non-charitable beneficiaries. 9 The character of distributions carry over from the CRT to the non-charitable beneficiaries on a “worst-in, first-out” basis—from income taxed at the highest rate (i.e., ordinary income) to that taxed at the lowest rates (i.e., tax-exempt income and returns of principal). 10 Because retirement accounts are a form of deferred compensation, distributions to beneficiaries will retain the character of ordinary income until the initial contribution to the CRT is exhausted. 11 Thereafter, the character of the distributions will depend on the type of asset and income earned.