Since the passing of the SECURE Act in 2019, lingering questions remain around its implementation. Earlier this year, the IRS proposed regulations to guide the interpretation of the SECURE Act, and when finalized, these regulations could affect the decisions you make in your retirement and estate planning, particularly regarding your individual retirement accounts (IRAs).

A major change of the SECURE Act requires beneficiaries who inherit IRAs due to the death of an IRA owner after 2019, other than certain select beneficiaries such as spouses and minor children, to draw down an inherited IRA within 10 years of the IRA owner’s death rather than over the beneficiary’s lifetime. While common interpretation of the new rule was that the beneficiary could defer the distributions for up to 10 years, withdraw the full amount, and pay taxes on the lump sum, the new proposed regulations require the beneficiary to continue taking required minimum distributions (RMDs) annually if the IRA owner had already begun taking RMDs during their lifetime. The IRS issued a Notice stating that, due to the current uncertainty surrounding the proposed regulations, it will not require RMDs for 2021 or 2022 for IRAs that are affected by the new rules. But, if you have such an inherited IRA, you should consult with your financial and tax advisors as to whether you should follow the current interpretation of the SECURE Act rules until the proposed IRS regulations are finalized or follow the proposed regulations now and take annual distributions in anticipation of these changes.

If you currently have a large IRA that you plan to leave to a beneficiary other than your spouse but you don’t want the beneficiary to be forced to realize income tax or have unrestricted access to the assets within 10 years, you may want to consider a different approach. If you are charitably inclined, a charitable remainder unitrust (CRUT) can provide fixed percentage distributions to a beneficiary or beneficiaries for their lifetime or a term of years up to 20. The remaining assets at the end of the trust term will be paid to one or more qualified charities that you choose.

For example, if you leave a non-spousal beneficiary such as an adult child an IRA with a balance of $500,000, under the SECURE Act the beneficiary will be required to withdraw the entire balance within 10 years. Assuming the beneficiary is in the 37% tax bracket, a one-tenth distribution in the first year would result in an additional $18,500 in income taxes. If the entire balance is withdrawn in the first year, the beneficiary would pay $185,000 in income tax, in effect making the inheritance worth only $315,000. Additionally, any growth within the IRA would be taxed at the beneficiary’s income tax rate when the distribution is made.

If instead a charitable remainder unitrust is named as beneficiary of the IRA, a trust recipient could receive a 5% payment for the lesser of their lifetime or 20 years. By naming a qualified charity like Washington University as a beneficiary, the CRUT can be funded with the IRA’s full value, tax-free. Assuming the trust’s total investment return averages 6%, over 20 years the beneficiary would receive average annual payments of approximately $27,000 totaling more than $415,000, and pay $162,205 in income taxes. When the trust terminates, more than $600,000 would pass to charity.

You might also consider making a charity the direct beneficiary of your IRA, and transferring wealth to your loved ones by other means, such as real estate, life insurance, or other asset. Speak with your estate planning professionals, such as an attorney or financial planner, about ways to transfer assets, including IRAs, to your loved ones. If you intend to support a charitable organization like WashU in your plans, the Office of Planned Giving is available to work with you and your advisers to help pass on your legacy and realize your philanthropic goals.