Introduction

 

Estate planning can be a daunting process for anyone, but it becomes especially complex for high-net-worth individuals with significant tax-advantaged retirement accounts. Recent legislative shifts—most notably the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019—have tightened the rules on inherited IRAs, making it more difficult for beneficiaries to stretch out tax-deferred growth.

 

However, there is a powerful tool that mitigates many of these challenges: the Charitable Remainder Unitrust (CRUT). This article explains why a CRUT may be ideal for large retirement accounts, especially now that the SECURE Act’s 10-year withdrawal requirement has replaced the traditional “stretch IRA.” We will also explore how CRUTs can provide beneficiaries with steady income and tax advantages while fulfilling a philanthropic legacy.

 

1. How the SECURE Act Changed Inherited Retirement Accounts

1.1 The Old “Stretch IRA” Approach

 

Before 2020, non-spouse beneficiaries inheriting IRA assets could stretch Required Minimum Distributions (RMDs) over their lifetimes. This “stretch IRA” enabled assets to grow in a tax-deferred environment for decades, frequently resulting in substantial long-term wealth for heirs.

 

1.2 The 10-Year Withdrawal Requirement

 

The SECURE Act ended the stretch strategy for most non-spouse beneficiaries, requiring inherited IRAs to be fully distributed within 10 years of the original owner’s death (there are exceptions for certain eligible designated beneficiaries, such as a surviving spouse or a disabled individual). This shorter timeframe can force beneficiaries to take large taxable withdrawals, often pushing them into higher tax brackets. It also reduces the window of tax-deferred growth and can lead to poor wealth management if heirs are unprepared to handle large sums within a decade.

 

Key Implications

1. Higher Taxes: Big withdrawals over a short period may trigger higher marginal tax rates.
2. Less Long-Term Growth: Shortening the distribution window diminishes compounding.
3. Risk of Mismanagement: Receiving a lump sum—or large annual checks—within 10 years can overwhelm young or financially inexperienced heirs.

Given these challenges, many individuals with seven-figure retirement accounts now look for alternatives that replicate some of the “stretch” benefits. One of the most effective strategies is naming a Charitable Remainder Unitrust (CRUT) as the beneficiary of an IRA.

 

2. Charitable Remainder Unitrust (CRUT) Basics

A Charitable Remainder Unitrust, authorized under IRC § 664, is an irrevocable trust with two sets of beneficiaries:

1. Non-Charitable Beneficiaries (often family members), who receive income from the trust for a fixed term (up to 20 years) or for life.
2. Charitable Beneficiaries, who receive whatever remains in the trust when the term ends, provided that portion equals at least 10% of the trust’s initial value.

2.1 Key CRUT Features

• Tax-Exempt Growth: Assets in the CRUT can grow tax-free until distributions are made to individual beneficiaries.
• Flexible Payouts: The trust must pay a fixed percentage (usually 5%–7%) of its fair market value each year, revalued annually.
• Charitable Component: At least 10% of the trust’s initial value must pass to a qualified charity. The ultimate remainder after the term expires goes to that charity.
• Defers IRA Taxation: When named as an IRA beneficiary, a CRUT can defer the tax that would otherwise be triggered when heirs inherit the account directly.

These traits make CRUTs attractive for high-net-worth individuals who want to support loved ones with structured income while ensuring that a portion of their estate creates a philanthropic legacy.

 

3. Why a CRUT Is Attractive After the SECURE Act

Instead of enduring forced distributions under the 10-year rule, a CRUT can provide:

1. Longer Distribution Period: A CRUT can pay beneficiaries for a lifetime or up to 20 years, neatly sidestepping the abrupt liquidation mandated by the SECURE Act.
2. Tax Savings: Spreading distributions over time can help keep heirs in lower tax brackets. The CRUT itself isn’t taxed on undistributed gains, allowing assets to compound more efficiently.
3. Asset Protection and Discipline: Beneficiaries receive payments on a set schedule, reducing the risks that come with a sudden windfall.
4. Philanthropic Purpose: The CRUT ensures a charitable organization benefits from the remainder at the end of the trust’s term.

For individuals with large IRAs who are sensitive to high tax rates, this structure can prove more beneficial than the direct 10-year payout.

 

4. Real-World Example: CRUT vs. 10-Year Distribution

To illustrate how a CRUT might outperform the 10-year distribution method, consider the following case:

4.1 Client Profile

• A divorced father in his mid-50s with two sons (ages 24 and 20).
• Approximately $2.5 million in IRAs.
• Goals:
1. Provide each son with a reliable income stream.
2. Reduce tax exposure.
3. Embed a charitable gift within his estate plan.

Under the SECURE Act, the sons would normally have to empty the inherited IRA accounts within 10 years, resulting in significant taxable events during or after their peak earning years. Given their youth, the father also worried about their ability to handle large sums responsibly.

 

4.2 The CRUT Plan

 

Working with an attorney, the father designated two testamentary CRUTs (one for each son) as the beneficiaries of his IRA. The trusts were set to pay out a fixed percentage (in the range of 5%–7% annually) over each son’s lifetime or, if necessary, for a 20-year term. By naming the CRUT instead of the sons directly:

• Distributions Are Spread Out: Smaller, periodic income streams could keep the sons in a lower tax bracket.
• Ongoing Tax-Deferred Growth: The trust’s undistributed income and gains grow tax-free, potentially boosting total returns.
• Philanthropic Goal: At least 10% of the trust’s initial value is ultimately directed to a charity.

4.3 The 10% Remainder Test and Younger Beneficiaries

 

A challenge arises when beneficiaries are very young. For a lifetime CRUT, the IRS requires that the present value of what the charity would eventually receive must be at least 10% of the trust’s initial contribution. Younger beneficiaries (with longer life expectancies) can make it harder to meet this “10% remainder test,” since more of the trust might be paid out over their lifetimes.

 

Risk of IRS Challenge: If interest rates change significantly or if the trust’s assumptions about beneficiaries’ ages are off, the trust might fail qualification.

 

Solution: The father’s attorney included a Trust Protector Clause, allowing a switch to a 20-year term if a lifetime payout wouldn’t satisfy the 10% test. This built-in flexibility preserved the trust’s tax benefits.

 

4.4 Crunching the Numbers

 

Using estate planning software (e.g., NumberCruncher), the attorney compared two scenarios:

1. 10-Year Distribution:
• Heirs forced to take out all IRA assets in 10 years.
• Likely higher marginal tax rates (35%–37%).
• Each son nets around $800,000 (after taxes).
• No charitable gift.
2. CRUT Distribution:
• Payments of 5%–7% annually over each son’s lifetime (or 20 years).
• Lower average tax brackets over an extended period, plus tax-free growth inside the CRUT.
• Potentially $1.1 million for each son, plus ~$250,000 total to charity.

Conclusion: The CRUT left both heirs with more after-tax wealth while fulfilling a philanthropic legacy. This dual benefit made the CRUT an attractive choice compared to the default 10-year rule.

 

5. Setting Up a CRUT for Your Retirement Accounts

5.1 Outline of the Process

1. Choose CRUT Structure
• Lifetime CRUT: Pays out over the beneficiary’s life.
• Term-of-Years CRUT: Maximum of 20 years.
• If beneficiaries are very young, a term-of-years can be easier to pass the 10% remainder test.
2. Draft the Trust Document
• Clearly identify trustee, non-charitable beneficiaries, payout rates, and the charitable recipient(s).
• Include Trust Protector or other flexible provisions to adjust if the 10% remainder test fails.
3. Designate the CRUT as IRA Beneficiary
• Complete a customized beneficiary form.
• Ensure this aligns with the IRA custodian’s rules and your broader estate plan.
4. Coordinate Investments
• After funding, the CRUT trustee manages assets to balance growth and income.
5. Ongoing Review
• Update the trust if laws change or if there are life events (births, deaths, disability).
• Verify that your chosen charity remains a qualified 501(c)(3) and in line with your wishes.

5.2 Testamentary vs. Inter Vivos CRUT

• Testamentary CRUT: Funded upon your death, commonly used to receive IRA assets.
• Inter Vivos CRUT: Created during your lifetime, sometimes funded with highly appreciated assets to reduce immediate capital gains. Though powerful, this approach is less common specifically for retirement accounts, as it requires giving up ownership of those assets while you are alive.

For the SECURE Act’s implications, a testamentary CRUT is typically preferred because it springs into being only after your death, simplifying administration and protecting your assets during your lifetime.

 

6. Who Should Consider a CRUT?

Although CRUTs can be useful to many, they are most advantageous if you:

1. Hold Large Retirement Balances: If you have $1 million or more in your IRA or 401(k), you face higher exposure to compressed tax timelines under the 10-year rule.
2. Desire Structured Payouts: If you want beneficiaries to avoid the temptation of lump-sum spending, a CRUT enforces discipline.
3. Prioritize Tax Efficiency: Spreading out distributions (and deferring taxes within the trust) often reduces overall tax liability.
4. Feel Strongly About Charity: A CRUT ensures a meaningful portion of your estate will support philanthropic causes you value.
5. Prefer Trust Protections: CRUTs can help protect assets from certain creditor claims and from heirs’ financial mismanagement.

 

7. Potential Downsides and Considerations

Though often beneficial, CRUTs are not a perfect fit for everyone. Consider the following:

1. Irrevocable Structure: Once funded at death, the CRUT can’t be undone. You (or the trustee) may have some flexibility to tweak administrative provisions, but not the fundamental terms.
2. Administrative Complexity: CRUTs require annual tax filings (Form 5227) and professional management. These costs can be justified if the trust holds substantial assets.
3. Lower Remainder for Heirs: Because a portion of the trust must go to charity, that piece isn’t available for beneficiaries. Nonetheless, projections often show that the tax advantages can leave heirs better off overall, even after the charitable remainder is satisfied.

 

8. Comparing CRUTs to Other Options

8.1 Standalone Retirement Trust (SRT)

 

A standalone retirement trust is designed to hold retirement assets for beneficiaries while offering some creditor and spendthrift protections. However, it typically cannot avoid the SECURE Act’s 10-year payout. As a result, it doesn’t provide the same extended payout schedule or charitable benefits that a CRUT does.

 

8.2 Charitable Remainder Annuity Trust (CRAT)

 

A CRAT pays a fixed dollar amount annually rather than a percentage of trust assets. Although it also meets philanthropic goals, CRATs tend to be less flexible over time. If the assets in the trust dwindle, beneficiaries still must receive the fixed amount, risking early depletion.

 

8.3 Donor-Advised Fund (DAF)

 

A donor-advised fund offers a convenient way to bundle charitable donations and maximize tax deductions in certain years. However, a DAF does not provide an income stream to heirs. It’s useful for charitable giving but doesn’t address the SECURE Act’s compressed payout for beneficiaries.

 

8.4 Roth Conversions

 

Converting to a Roth IRA before death might be a simpler, more direct strategy in some cases—especially if the client wants heirs to receive tax-free distributions.

 

8.5  Life Insurance Planning

 

Using an irrevocable life insurance trust (ILIT) to replace wealth lost to taxes or to fund charitable legacies is another route.

 

9. Practical Tips and Best Practices

1. Talk to Qualified Professionals: Seek a skilled estate planning attorney and tax advisor who understand CRUTs, retirement accounts, and the SECURE Act’s rules.
2. Consider a Trust Protector: As demonstrated in the example, a Trust Protector can adjust terms if the IRS tests are not met or if circumstances change.
3. Right Payout Percentage: A typical CRUT payout rate is between 5% and 7%. Aim too high, and the remainder for charity may not meet the required 10%.
4. Explain the Plan to Your Beneficiaries: Make sure they understand the rationale, timelines, and how distributions will occur.

 

10. Frequently Asked Questions

Q1: Do CRUT payouts completely avoid taxes for beneficiaries?
No. Beneficiaries pay taxes on CRUT distributions according to a four-tier system (ordinary income first, capital gains second, tax-exempt income third, and principal last). However, the trust itself is largely exempt from paying income tax on undistributed gains.

 

Q2: Can I designate multiple charities as CRUT remaindermen?
Yes. You can divide the remainder among several qualified 501(c)(3) organizations, or allow the trustee or Trust Protector to select specific charities later.

 

Q3: What if my beneficiaries need a bigger distribution in a given year?
Under a standard CRUT, the annual distribution percentage does not change unless you initially set up a net-income make-up CRUT (NIMCRUT). A NIMCRUT can allow smaller distributions in lean years and “make up” for them when investment income rises.

 

Q4: What if the charity I select goes out of business or changes its mission?
The trust agreement can include provisions allowing a trustee or Trust Protector to redirect the remainder to a new charity if the original one no longer qualifies or aligns with your intentions.

 

11. Bringing It All Together: Is a CRUT Right for You?

11.1 The Post-SECURE Act Environment

 

The SECURE Act drastically shortened the timeframe for inheriting and liquidating retirement accounts. For high-net-worth individuals with retirement assets well into the seven figures, forcing large withdrawals over 10 years can result in higher taxes and a diminished overall inheritance. Furthermore, younger heirs may struggle to manage—or even squander—a substantial influx of funds within a decade.

 

11.2 CRUT Advantages at a Glance

• Lifetime or Extended Payments: Go beyond the 10-year rule.
• Potentially Larger Net Inheritance: Beneficiaries often end up with more after taxes, thanks to tax-free growth inside the trust.
• Philanthropic Benefits: Fulfills charitable goals without forgoing family legacies.
• Asset Protection: Trust structures can safeguard funds from creditors or impulsive spending.

11.3 Who Benefits Most?

 

A CRUT can significantly benefit families in which:

• The account owner wants to avoid higher marginal taxes on large, forced distributions.
• Younger beneficiaries could benefit from structured payouts.
• The owner wishes to leave a portion of their legacy to charitable causes.

 

12. Conclusion

For many people who have amassed considerable wealth in IRAs or other retirement accounts, the SECURE Act’s 10-year distribution requirement raises critical questions about tax efficiency, beneficiary responsibility, and wealth preservation. In this environment, a Charitable Remainder Unitrust (CRUT) can be a powerful estate planning vehicle that sidesteps the 10-year rule, distributes income gradually, and supports philanthropic endeavors.

 

A Final Recap

• CRUTs Defer Taxes: By naming a CRUT as the beneficiary of your IRA, you effectively spread out tax liability for heirs while enjoying continued tax-free growth inside the trust.
• Structured Payouts: Beneficiaries receive manageable distributions, promoting better financial discipline and protecting them from impulsive decisions.
• Charitable Legacy: A portion of your wealth makes a lasting impact on the charities that mean the most to you.
• Flexibility: Through careful drafting and the use of a Trust Protector, a CRUT can adapt to changes in tax laws or family circumstances.

Are you looking for sophisticated solutions that address both the constraints of the SECURE Act and your personal financial goals? We invite you to contact Slowik Estate Planning to explore whether naming a CRUT as beneficiary of your retirement accounts might be the right option. We assist families in Georgia and the metro Atlanta area with designing custom estate plans that minimize taxes, provide meaningful inheritances, and leave a charitable imprint for generations to come.