Using a CRUT to Recreate the Lifetime Stretch for an Inherited IRA
The SECURE Act substantially changed the way many families inherit retirement accounts.
Before the Act, a non-spouse beneficiary could generally calculate required minimum distributions using their life expectancy. A younger beneficiary might receive relatively modest annual distributions while the remaining IRA continued growing tax-deferred for several decades. For most non-spouse beneficiaries, that lifetime “stretch” has been replaced by a ten-year distribution period. The result can be larger taxable distributions, less time for tax-deferred growth, and significant income arriving during the beneficiary’s peak earning years.
A charitable remainder unitrust may provide an alternative.
How the Strategy Works
Rather than naming a child or another individual directly, the IRA owner names a properly drafted testamentary charitable remainder unitrust, or CRUT, as the IRA beneficiary. When the owner dies, the IRA is distributed to the CRUT. The IRA itself does not continue inside the trust. Instead, the qualifying CRUT receives and invests the proceeds.
Because a CRUT is generally exempt from income tax, receiving the IRA does not produce the same immediate income-tax result that would ordinarily arise if the entire account were distributed to an individual.
The CRUT then pays a stated percentage of its annually determined value to the individual beneficiary. Those payments can continue for the beneficiary’s lifetime. When the beneficiary dies, the remaining trust property passes to one or more qualified charities.
Recreating the Practical Effect of the Stretch IRA
The individual does not inherit an IRA, and the CRUT payments are not calculated under the inherited-IRA life expectancy tables. Nevertheless, the structure can recreate several of the old stretch IRA’s practical benefits:
- Payments may continue throughout the beneficiary’s lifetime.
- Assets remaining in the CRUT can grow without current taxation at the trust level.
- Taxable income may be recognized gradually rather than compressed into ten years.
- The annual payment can increase if the trust’s value grows.
Unlike a charitable remainder annuity trust, which pays an amount based on the trust’s initial value, a CRUT recalculates its payment annually. This provides some protection against inflation and allows the beneficiary to participate in the trust’s investment growth. The reverse is also true. If the trust declines in value, the beneficiary’s payment will decline.
The Income Tax Is Deferred, Not Eliminated
Using a CRUT changes the timing of taxable income. It does not eliminate that income. Traditional IRA proceeds generally enter the CRUT’s ordinary-income tier. Under the charitable remainder trust distribution rules, ordinary income is carried out to the individual beneficiary before capital gains, tax-exempt income, or principal. Payments from an IRA-funded CRUT will therefore commonly be taxed as ordinary income for many years.
The potential benefit is that the income reaches the beneficiary through annual unitrust payments over a lifetime instead of being compressed into the SECURE Act’s ten-year period. That difference can be particularly valuable when the beneficiary is already in a high income-tax bracket.
Why a 5% CRUT?
A CRUT must distribute at least 5% of its annually determined value. It must also satisfy an actuarial test under which the charitable remainder equals at least 10% of the value initially contributed. When the objective is to approximate a lifetime stretch, the minimum 5% payout is often the logical starting point. A lower payout keeps more assets invested inside the trust. If the trust’s investment return exceeds its payout and expenses, its value may grow, potentially increasing both future payments and the eventual charitable remainder. Those results are not guaranteed. Investment performance, expenses, longevity, and the tax characteristics of the trust’s investments all affect the outcome.
The Beneficiary-Age Sweet Spot
The practical sweet spot is often a beneficiary in their 40s or 50s at the IRA owner’s death. A beneficiary in that range may have a sufficiently long life expectancy for CRUT payments to continue decades beyond the ten-year inherited-IRA period. At the same time, the beneficiary may be old enough for a lifetime 5% CRUT to satisfy the 10% charitable-remainder test. This is a planning range, not a statutory safe harbor.
A beneficiary younger than 40 may also qualify and could receive an even longer stream of payments. A beneficiary in their 60s may still be a viable candidate, although the potential extension beyond ten years becomes less significant. The actual result depends on several factors:
- The beneficiary’s age
- The CRUT payout percentage
- The Section 7520 rate
- The payment frequency
- The applicable mortality assumptions
- Whether the CRUT is measured over one life or multiple lives
The calculation must be performed using the circumstances that exist when the trust is funded.
Charitable Intent Matters, but It May Not Drive the Decision
A CRUT requires an irrevocable charitable remainder. The client must be comfortable knowing that the assets remaining at the beneficiary’s death will pass to charity rather than to the beneficiary’s descendants.
That does not mean philanthropy must be the client’s primary objective.
If the beneficiary is a high earner, direct inheritance of a substantial traditional IRA may force significant ordinary income into the ten-year period during some of the beneficiary’s highest-tax years. A CRUT may spread that income over the beneficiary’s lifetime while allowing the assets remaining in the trust to continue growing without current taxation at the trust level.
Depending on the beneficiary’s age, tax bracket, longevity, investment returns, and the CRUT’s expenses, the lifetime after-tax benefit may compare favorably with an outright inheritance. In the right case, the charitable remainder may come at a smaller economic cost to the family than the headline value of the charitable gift suggests.
Model the After-Tax Result
The comparison should not focus solely on the gross value of the IRA or the amount projected to pass to charity. Advisors should model:
- The beneficiary’s cumulative after-tax distributions
- The timing of those distributions
- Growth inside and outside the CRUT
- The beneficiary’s expected marginal tax rates
- The effect of an early or extended lifespan
- Trust expenses and administration costs
- The value ultimately passing to charity
The CRUT still involves a real charitable transfer. But for a high-income beneficiary, the decision may be much closer than “family versus charity.” It may instead be a choice between a taxable ten-year inheritance and a lifetime income structure that also produces a charitable legacy.
For the right family, a lifetime 5% CRUT may be one of the closest modern counterparts to the pre-SECURE Act stretch.
