Can a CRT Stretch an Inherited IRA?

Christopher Hoyt of the University of Missouri School of Law presented “Can a CRT Stretch an Inherited IRA” at the 55th Annual Heckerling Institute of Estate Planning. Mr. Hoyt discussed the rules for inherited IRA distributions beginning in 2020 under the SECURE Act. The general rule is that an inherited IRA must be liquidated in ten years, or possibly five in the case of a non-designated beneficiary, with some exceptions. He also presented the new life expectancy tables, effective in 2021, used to compute the annual required minimum distributions (RMD) amounts which will reduce the distributions between .3% and .5% each year.

Mr. Hoyt suggested one way to stretch out the distributions and income tax recognition of an inherited IRA to beneficiary(ies) is by the use of a charitable remainder trust (CRT).  A CRT can be set up for life or a term of years not to exceed 20 years. At the end of the non-charitable beneficiary’s term, the remaining assets of the CRT goes to charities. A CRT is exempt from tax and there is no taxable income to the beneficiaries until they receive distributions from the CRT.

In most cases the CRT will not replace the wealth of the family if the IRA was paid directly to them.  This tool is best for someone with charitable intentions who also wants to benefit family during their family member’s life or for a number of years.  It also works best with an IRA in an estate that is not subject to federal estate tax.

Discussion included the multiple planning and legal hurdles to overcome and an explanation of how to select the best type of CRT to use. 

Mr. Hoyt stressed the importance of properly drafted documents to avoid significant income tax problems if the taxpayer is attempting to utilize a CRT to stretch out an inherited IRA – a useful strategy in certain circumstances. The first step is selecting the type of CRT and its various options and then drafting the account beneficiary designation form to name the CRT as the beneficiary.

And for more coverage of the 2021 Heckerling Institute on Estate Planning, please also see:

• Recent Developments Within Estate Planning
• Can a CRT Stretch an Inherited IRA?
• Strategic Estate Planning for Another Year of Change
• The Generation-Skipping Transfer Tax