Conrad Teitell is a principal at Cummings & Lockwood in Stamford, Conn. Conrad Teitell

The SECURE1 Act kills the stretch IRA for most heirs. Until this new legislation, an heir could generally have required minimum distributions stretched over his or her life expectancy. And that minimized taxes—plus the assets in the heir's IRA grew tax-free until withdrawn.

Highlights of the new law:

  • Required Minimum Distributions start at age 72 (up from 70½).
  • Most heirs' IRA payments can't be stretched out for more than 10 years.
  • But these beneficiaries (with some qualifications) qualify for "life-expectancy" IRA payments: (1) the IRA owner's surviving spouse; (2) her or his minor child; (3) disabled beneficiaries; (4) chronically ill individuals; and (5) individuals who aren't more than 10 years younger than the deceased IRA owner.

Among other provisions, the SECURE Act:

  • Repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.
  • Allows long-term part-time workers to participate in 401(k) Plans.
  • Allows penalty-free withdrawals from retirement plans up to $5,000 per individual for any "qualified birth or adoption distributions."
  • Expands 529 education savings accounts to cover costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments (including those for siblings).

Drum roll—enter the CHIPS IRA2 (Charity Heirs Income Plan Stretch IRA): Working around the 10-year stretch IRA limitations using charitable remainder trusts:

  • Taxwell Smart provides that on his death a charitable remainder unitrust (meeting all the CRUT requirements—e.g., payout of at least 5%, 10% minimum charitable remainder interest) pay his grandchild for life or term of years (not exceeding 20 years). This will save estate taxes (estate tax charitable deduction for value of charitable remainder interest) for Mr. Smart if he's subject to that tax.
  • Whether Taxwell is or isn't subject to the estate tax, the transfer of his IRA at his death to fund the CRUT won't subject the heir to tax on Income in Respect of a Decedent (IRD). Payments to the grandchild will be taxable under the four-category taxation regime. And a charitable gift is made at the trust term's end.
  • Keep in mind that the Stretch CRT has to pass the 10% minimum remainder interest requirement. For younger heirs, the stretch can't be for life but will be for a term of years (not exceeding 20 years). And for CRATs, the trust must also pass the 5% probability test of Rev. Rul. 77-374.
  • No surprise, charitable intent is important. The cost of generosity is reduced by the tax savings to the heir who can have IRA payments stretched more than 10 years.

Giving an heir an income tax charitable deduction:

  • Suppose Taxwell's grandson is a successful farmer growing hedge funds in Greenwich, Conn. Grandson Hedgely is already rich beyond the wildest dreams of avarice.

Nevertheless, Taxwell creates a testamentary CRUT for Hedgely with his IRA. Several years go by and Hedgely concludes he really doesn't need the CRUT payments. So he gives his remaining life interest to the named qualified public charitable remainder organization (or qualified public charity that Hedgely has named if he has been given that power). Hedgely will then get an income tax charitable deduction for the then value of his life interest. Taxwell has, in effect, given Hedgely an income tax charitable deduction.

Hedgely on his own figured out how to benefit a charity during the term of his CRUT life interest and get an income tax charitable deduction.

  • Suppose Taxwell's estate is subject to the estate tax. On his deathbed he tells Hedgely that he's creating a testamentary CRUT for him funded with Taxwell's IRA. Taxwell extracts Hedgely's promise that he'll give his remaining life interest to the named publicly supported charitable remainder organization within two years of Taxwell's death.

If IRS Agent Seigfried learns of this, he could well deny Taxwell's estate an estate tax charitable deduction for the charitable remainder interest; and collect IRD tax from Hedgely. Taxwell and Hedgely had better talk about this in a motel room with the water running.

Parthian shot. Will the age for taking required minimum distributions (RMDs) now age 72 (instead of 70½) keep donors (ages 70½ to 71) from making charitable distributions from their IRAs until age 72?

Time will tell. Remember, distributions from IRAs when the RMD age was 70½ qualified as QCDs even though they weren't RMDs. So donors can still at ages 70½ to 71 make charitable gifts from their IRAs.

Endnotes:

  1. Setting Every Community Up for Retirement Enhancement Act (effective 1/1/20). The U.S. Bureau of Acronyms must have worked overtime and had to stretch to come up with this acronym.
  2. How I came up with the CHIPS acronym: Many long showers—where I do my best thinking—didn't help. But then, it hit me while marathon TV football viewing with two grandsons over the holidays. We consumed bushels of CHIPS. Simply put, Charities and Heirs will be in the CHIPS using Income Plans to Stretch heirs' IRA payments. And that's my story—and I'm sticking to it.

Conrad Teitell is a principal at Cummings & Lockwood in Stamford, Conn.