Multi-beneficiary charitable remainder trusts: A strategic alternative to stretch IRAs

A charitable remainder trust is an irrevocable trust designed to generate income for you or your beneficiaries while ultimately providing a remainder benefit to one or more charitable organizations. When established as a multi-beneficiary trust, it can serve multiple generations of family members before the remaining assets transfer to charity.

CRTs are split-interest trusts recognized under Section 664 of the Internal Revenue Code. They function by first providing income to non-charitable beneficiaries for a specified period (either a term of years or lifetimes), after which the remaining trust assets pass to the designated charitable organizations.

Before answering how multi-beneficiary CRTs can help, it's important to understand what changed with the SECURE Act.

Prior to 2020, non-spouse beneficiaries who inherited IRAs could stretch distributions over their life expectancy, often resulting in:

• Smaller annual required withdrawals.
• Lower annual tax burdens.
• Extended tax-deferred growth.
• Potentially significant wealth transfer across generations.

Under the SECURE Act, with limited exceptions, these beneficiaries must now withdraw all inherited retirement account assets within 10 years of the original owner's death. This accelerated timeline can push beneficiaries into higher tax brackets and substantially reduce the long-term value of their inheritance.

A multi-beneficiary CRT can effectively simulate many benefits of the old stretch IRA strategy while adding charitable impact. Here's how the strategy works:

• You establish a charitable remainder trust during your lifetime or through your will or trust.
• You name the CRT as the beneficiary of your IRA assets.
• Upon your death, the IRA assets transfer to the CRT (avoiding immediate income taxation).
• The CRT provides income to your named beneficiaries according to the terms you set.
• After all income beneficiaries have received their distributions, the remaining assets go to your chosen charity or charities.

This structure creates several advantages that help address the loss of the stretch IRA option.

When implementing this strategy, you'll need to choose between two primary types of charitable remainder trusts:

Charitable remainder annuity trust (CRAT)

A CRAT pays a fixed dollar amount annually to your beneficiaries. This amount is determined when the trust is created and remains constant throughout the trust term. For example, if you fund a CRAT with $1 million and specify a 5% payout, your beneficiaries will receive $50,000 annually, regardless of how the trust's investments perform.

Key considerations for CRATs:

• Provides income certainty for beneficiaries.
• Cannot accept additional contributions after initial funding.
• May deplete principal in low-return environments.
• Less flexibility than a CRUT.

Charitable remainder unitrust (CRUT)

A CRUT pays a fixed percentage of the trust's value, recalculated annually. If the trust grows, distributions increase; if investments underperform, distributions decrease. Using the same example of $1 million with a 5% payout, the distribution would start at $50,000 but would change each year based on the trust's performance.

CRUTs offer several variations:

• A standard CRUT pays a fixed percentage of the trust's value each year.
• A net income CRUT (NICRUT) pays the lesser of the fixed percentage or the trust's net income.
• A net income with makeup CRUT (NIMCRUT) is similar to a NICRUT but allows for "makeup" distributions in future years if the trust underperforms.

Key considerations for CRUTs:

• Potential for increasing payments if investments perform well.
• Can accept additional contributions.
• Greater flexibility than CRATs.
• Potential for income timing strategies with NICRUTs and NIMCRUTs.

Using a charitable remainder trust as an IRA beneficiary creates several potential tax advantages:

Immediate tax benefits

When you name a CRT as your IRA beneficiary, the entire amount transfers to the trust upon your death without triggering immediate income taxation. This avoids the compressed 10-year distribution schedule mandated by the SECURE Act.

Tax-deferred growth

Assets inside the CRT grow tax-free, similar to how they would in an IRA. This tax-deferred growth can significantly enhance the long-term value available for both income beneficiaries and the ultimate charitable beneficiaries.

Potential estate tax benefits

The present value of the charitable remainder interest may qualify for an estate tax charitable deduction, potentially reducing your estate tax liability.

Income tax treatment for beneficiaries

While beneficiaries will pay income tax on distributions they receive from the CRT, these payments are typically characterized under a four-tier system:

• Ordinary income (highest tax rate).
• Capital gains.
• Tax-exempt income.
• Return of principal (tax-free).

This tiered approach can sometimes be more favorable than receiving directly taxable IRA distributions.

Extended income stream beyond 10 years

Perhaps the most significant advantage is the ability to extend distributions beyond the SECURE Act's 10-year limit. By structuring the CRT to pay income for beneficiaries' lifetimes, you can potentially provide decades of financial support.

Preservation of wealth through tax-deferred growth

The tax-free accumulation environment inside the CRT allows for maximized compound growth, potentially resulting in larger distributions for beneficiaries and a more substantial charitable gift.

Creation of a meaningful charitable legacy

Beyond benefiting your loved ones, this strategy creates a significant philanthropic legacy that reflects your values and supports causes important to you.

Flexibility in beneficiary selection

A multi-beneficiary CRT allows you to name multiple family members as income beneficiaries, potentially spanning several generations (subject to certain limitations).

Protection from creditors

Trust assets generally enjoy protection from beneficiaries' creditors, providing an additional layer of security for the inherited wealth.

While multi-beneficiary CRTs offer significant advantages, they come with important limitations and considerations:

Irrevocable structure

Once established, the terms of a CRT generally cannot be changed. This inflexibility requires careful planning and consideration of potential future circumstances.

Mandatory charitable component

By design, a portion of the trust assets (typically at least 10% of the present value) must ultimately go to charity. If maximizing assets to family members is your primary goal, other strategies might be more appropriate.

Complexity and costs

CRTs involve more complex setup and ongoing administration than direct IRA inheritance, including:

• Legal fees for drafting the trust.
• Ongoing trustee fees.
• Annual tax filings.
• Investment management costs.

Income distribution rules

CRTs must follow specific formulas for distributions, which may not align perfectly with beneficiaries' changing financial needs.

Minimum age requirements

There may be practical limitations or complications when naming very young beneficiaries due to IRS rules regarding life expectancy calculations.

For individuals with retirement assets who are also charitably inclined, multi-beneficiary charitable remainder trusts represent a sophisticated planning strategy worth exploring in the post-SECURE Act landscape. While not a perfect replacement for the stretch IRA, these trusts offer a compelling combination of benefits: extended income for beneficiaries, tax-efficient wealth transfer and meaningful philanthropic impact. The decision to implement this strategy should be made as part of a comprehensive estate planning process that carefully weighs your financial goals, family needs and charitable intentions. Working with experienced financial, tax and legal advisors is essential to properly structure the trust and ensure it aligns with your broader estate plan.