TAXATION

Before the SECURE Act went into effect on Jan. 1, 2020, the “stretch IRA” was a popular tax-planning strategy for wealthy families. IRA owners could leave their IRAs to young, nonspousal beneficiaries when By Peter J. Melcher, MBA, JD, LLM and they died, minimizing required minimum distributions and maximizing the amount that could stay in the IRA to grow at a pre-tax rate of return. The SECURE Act greatly limited this strategy by providing that all amounts in nonspousal inherited IRAs must generally be distributed within 10 years after the IRA owner dies. In this article, we will suggest

Robert S. Keebler, some strategies that IRA owners

CPA/PFS, MST, might use to replicate the tax CGMA deferral previously provided by stretch IRAs or otherwise improve the tax consequences for inherited IRAs. These strategies include the following: 1. Charitable remainder trusts 2. Multi-generational accumulation trusts 3. IRC Section 678 trusts 4. Roth IRA conversions 5. Taking advantage of beneficiary exceptions Multigenerational non-grantor trusts

Charitable remainder trust (CRT) as IRA beneficiary If a non-grantor trust is named the beneficiary of an IRA, all the IRA funds would have to be paid to the trust by the If a CRT is named the beneficiary of a traditional IRA, end of the 10-year period after the IRA owner died, but the there is no tax when the funds in the IRA are distributed to the trust. Tax is payable only when the beneficiaries receive distributions from the CRT. These distributions can be spread out over a term of years not to exceed 20 or for the life or lives of a named individual or individuals, creating a trustee would have discretion to decide how much, if any, to pay to the beneficiaries and how much to keep in the trust. All amounts retained in the trust would be subject to the high trust income tax rates. For 2021, all trust income above $13,050 long deferral period. A potential downside of the strategy is would be taxed at the top individual income tax rate of 37%. that the present value of the remainder interest must be at However, amounts distributed to the trust’s beneficiaries would least 10% of the value of the assets transferred to the trust. be taxed at the beneficiaries’ tax rates. If the accumulation

Thus, charitable intent might be necessary to make this trust had multiple beneficiaries, including both children and strategy work. grandchildren, distributions might be kept in low tax brackets.

In this article, we will suggest some strategies that IRA owners might use to replicate the tax deferral previously provided by stretch IRAs or otherwise improve the tax consequences for inherited IRAs.

Although the 10-year rule applies to Roth IRAs as well as to traditional IRAs, this might be a particularly good time to do a conversion. Tax rates are likely to be higher when distributions are received from the IRA than they are currently.

Non-grantor trusts might also provide important non-tax benefits. They limit beneficiary access to funds, protect assets from creditors, provide professional management of trust assets and may enable the trustee to manage tax brackets. They may also provide divorce protection and dead-hand control and facilitate estate planning and planning for special-needs beneficiaries.

Section 678 trust

As noted above, any amounts received from an IRA that are retained in a non-grantor trust are taxed at the trust’s high marginal rates. By making the trust an IRC Section 678 trust, however, it may be possible to accumulate amounts in the trust without paying a high rate of tax. Under Section 678, a person other than the trust’s grantor is treated as the owner of a trust if that person is given a power to withdraw trust assets without the consent of any other person. If a trust beneficiary is treated as the owner of a trust under Section 678, all items of income, deductions and credits against tax of the trust would be reported on the beneficiary’s Form 1040 instead of on the trust’s tax return. The beneficiary’s marginal tax bracket might be substantially lower than the marginal tax bracket of the trust, reducing the tax paid on any IRA distributions retained by the trust and perhaps making it feasible for the trust to retain some of the income received from the IRA.

Roth IRA conversions

Following the 2020 election, Democrats now control both branches of Congress as well as the presidency. This, combined with spiraling budget deficits, makes it likely that tax rates will increase in the future. Although the 10-year rule applies to Roth IRAs as well as to traditional IRAs, this might be a particularly good time to do a conversion. Tax rates are likely to be higher when distributions are received from the IRA than they are currently.

Taking advantage of beneficiary exceptions

The 10-year rule doesn’t apply if the beneficiary fits into the definition of an “eligible designated beneficiary,” providing an incentive to leave all or a portion of an IRA to one of these beneficiaries. An “eligible designated beneficiary” is any designated beneficiary who is one of the following: • The surviving spouse of the IRA owner • A child of the IRA owner who has not reached majority • Disabled • A chronically ill individual • An individual who is not more than 10 years younger than the IRA owner Note that a child will cease to be an eligible designated beneficiary as of the date the child reaches majority. At that time, any remaining portion of the individual’s interest shall be distributed under the 10-year rule.

Peter J. Melcher, MBA, JD, LLM, is a partner in Keebler & Associates LLP. Contact him at peter.melcher@keeblerandassociates.com or 414-421-4992. Robert S. Keebler, CPA/PFS, MST, CGMA, is a partner with Keebler & Associates LLP, Green Bay. Contact him at 920-593-1701 or Robert.Keebler@KeeblerandAssocates.com.