Prior to 2020, a "Stretch IRA" was used to extend the tax-deferred status of an inherited IRA when it passed to a non-spouse beneficiary (i.e. children and/or grandchildren). This way you could pass an IRA down to the next generation and beneficiaries would enjoy the tax benefits of an IRA over their respective lifetimes.
This have dramatically changed. Under the new SECURE Act, children and heirs must take distributions over a maximum term of 10 years. (The government wants your money sooner!) By reducing the ability to take distributions over a beneficiaries, they will have to pay substantially more income taxes on inherited IRAs. [Certain "eligible beneficiaries" such as a surviving spouse, a disabled or chronically ill beneficiary, an individual who is not more than 10 years younger than the IRA owner, and a minor child - are not subject to the 10-year distribution rule.]
There is, however, another way that IRA holders can obtain tax advantages by replacing "Stretch IRAs" with a Testamentary Charitable Reminder Unitrust ("Testamentary Unitrust"). A Testamentary Unitrust is a tax-exempt trust designed to make income payments to beneficiaries over their lifetimes or for 20 years.
The trust is funded when you die according to the beneficiary terms on your IRA. Once the trust is funded, your beneficiaries receive payments from the trust account over their lifetimes or a maximum term of 20 years. At the end of the trust period, the remaining principal is distributed to a charity of your choice.
By extending the distributions of the IRA throug a Testamentary Unitrust, you can realize significant benefits:
- Provide income tax savings to your beneficiaries
- Generate a charitable estate tax deduction, and
- Make a significant charitable gift to a great cause.