Take-Away: An IRA might name a charitable remainder unitrust (CRUT) as its beneficiary to delay the recognition of the IRA’s ordinary income longer than the SECURE Act’s normal 10-year distribution rule, while also creating a charitable estate tax deduction for the CRUT’s remainder interest, which may become more important if the IRA owner dies after 2025.

Background: Shortly after the SECURE Act was adopted, estate planners began to look for new ways under which distributions from an IRA could be stretched beyond the SECURE Act’s new ‘maximum 10-year’ period (ignoring the eligible designated beneficiary categories.) One such ‘solution’ previously covered was to make the IRA payable to a charitable remainder unitrust (CRUT) where the distributions could be made over the CRUT beneficiary’s lifetime, with the CRUT remainder ultimately passing to charity. With 2026 fast approaching with its projected drop in an individual’s applicable exemption amount, it might be time to again revisit the IRA-paid-to-CRUT strategy for comparable stretch benefits and to reduce exposure to federal estate taxes. This may particularly be relevant  with the IRS’s SECURE Act Proposed Regulations where it invoked it’s ‘at least as rapidly’ interpretation so that when the IRA owner dies at age 72 or older, distributions from the inherited IRA must be taken annually, and could be over a period shorter than 10 years if the beneficiary is older and the deceased account owner.

CRUT: A charitable remainder unitrust (CRUT) has received most of the attention as a device to replace the former stretch IRA distribution rule. A CRUT mitigates the impact of the SECURE Act’s  ‘death-of-the-stretch.’ At its most basic level, a CRUT is a trust that receives assets, makes ongoing distribution of those assets, and their earnings, for some period of time to a named individual beneficiary, and then terminates and distributes what is left in the CRUT to the charitable remainder beneficiary. As a charitable entity, a CRUT does not pay tax on the income that receives or earns. Thus, when a CRUT is named as the beneficiary of the IRA, distributions to the CRUT’s individual beneficiary will include distributions from the IRA paid to the CRUT, as well as any capital gains earned within the CRUT by its investments. Consequently, the CRUT functions much like a now pretty much  prohibited stretch inherited IRA, since distributions from the CRUT is for the CRUT beneficiary’s lifetime or for a fixed period of time, e.g. 20 years.

10% Remainder Rule: The Tax Code requires that the actuarily determined future value of the CRUT be no less than 10% of the value of the Trust at its inception. [IRC 664(d)(2)(D).] Thus, from the outset, the IRA owner will look to use a CRUT purely as a wealth transfer vehicle, and not so much due to their charitable intent. That then leads to the question the IRA owner must ask,  whether the tax deferral benefit of the CRUT are substantial enough for their heir to make up for giving away at least 10% of the balance of the IRA to charity.

5% Distribution Rule: In order to qualify as a CRUT, the Trust must both distribute at least 5% of its assets annually, and have an actuarial value of the remainder interest of the Trust equal to at least 10% of the initial contribution to the trust. This required 5%-10% rule combination makes it impossible to name a ‘young’ individual as the beneficiary of a CRUT, or to even be included among a group of named beneficiaries. Consequently,  if the goal is to stretch IRA distributions as long as possible, these rules indirectly act to curb just how long the IRA’s ordinary income can be delayed before being recognized and taxed.

Taxable Distributions: While all distributions from an inherited IRA are considered ordinary income to the beneficiary, a CRUT retains the character of any income that it receives or generates. It  then distributes that income to the CRUT beneficiary using a worst-in, first-out basis. Thus, the CRUT trustee will distribute to its beneficiary first any ordinary income, then long-term capital gains or dividends, and only then tax-free income, e.g. municipal bonds, followed lastly by any distributions of non-taxable principal. In other words, if a CRUT has capital gain income, it can distribute those amounts to the CRUT beneficiary, but it can only do so after first distributing all ordinary income, i.e. the IRA balance, because ordinary income is worse income that is taxed at a higher tax rate.

Example #1: Monica dies with an IRA balance of $400,000. Monica names her son Sam as the designated beneficiary of her IRA. Under the SECURE Act, Sam will be required to take the inherited IRA balance within 10 years. If Sam takes one-tenth ($40,000) in year one after Monica’s death, and Sam is in the 22% marginal income tax bracket, Sam will pay $8,800 in additional income tax for that year. If Sam decides to take the entire IRA balance in the first year after his mother’s death, such a large distribution will automatically put Sam in at least the 35% income tax bracket, which means that Sam will pay a minimum of $140,000 of additional income tax. If Sam’s total income puts him in the 37% marginal federal income tax bracket, the lump sum distribution would raise Sam’s tax bill by $148,000. If Sam is in the 22% tax bracket, in effect his $400,000 inheritance is worth only $312,000 at Monica’s death, or even less if Sam chooses to take a lump sum distribution. Additionally, any gains or growth within the IRA are also taxed at Sam’s income tax rate when a distribution is made to him.

Example #2: Assume, instead, that Monica names a CRUT as beneficiary of her $400,000 IRA. Monica provides that Sam is to receive a 7% unitrust payment from the CRUT for the lesser of his lifetime or 20 years. Since there is a qualified charity as the ultimate beneficiary, (e.g. Monica created a donor advised fund as the remainder beneficiary of the CRU,) the CRUT can immediately take the full $400,000 from the IRA  tax-free. Therefore, the CRUT is funded with $400,000 immediately after Monica’s death. The CRUT is invested in bonds and growth stocks that net $4,000 income after expenses each year. In the first year of the CRUT, Sam receives 7% of the total amount, or $28,000. The $4,000 attributed to income that the CRUT earned is allocated to Sam under the applicable tax law. Of that distribution, Sam will only pay $880 in additional income tax ($4,000 x 22%.) The tax savings will be even higher if Sam is in a higher marginal income tax bracket. But the CRUT’s distributions to Sam go on for 20 years, not 10 years, spreading the distributions over a longer period and presumably exposed to lower marginal income tax brackets over those 20 years.

NIMCRUT: One (admittedly aggressive) delayed distribution option to consider is to have an IRA payable to a net income make-up charitable remainder unitrust, or NIMCRUT. Since the beneficiary of the IRA is not an individual, i.e. it is a non-see-through trust, the mandatory payout period from the inherited IRA is 5 years, not 10 years as otherwise required under the SECURE Act.  However, that shorter payout period is not an impediment when a NIMCRUT is named as the IRA beneficiary, since it is a tax exempt entity.

Estate Tax: The value of the NIMCRUT’s remainder interest that is allocated to charities will qualify for the federal estate tax charitable deduction, which may be important if the IRA owner’s death occurs after 2025 when the applicable exclusion amount is cut in half. [IRC 2055.]

Tax Exempt Entity: The inherited IRA can be immediately paid out to the NIMCRUT, which is exempt from federal income tax [IRC 664.]. In short, flushing the IRA’s assets directly to the NIMCRUT shortly after the IRA owner’s death will cause no income tax to be incurred.

Duration: As a gross generalization, a NIMCRUT can pay out up to 11% annually if the NIMCRUT’s durational term is 20-years.

The LLC ‘Spin:’ The trustee of the NIMCRUT could immediately place those distributed IRA assets into an LLC, with the NIMCRUT being designated as the sole member of the LLC. Thus, the IRA proceeds will be transferred by the NIMCRUT trustee to the LLC where they are held for investment.

Income Tax: The IRA’s taxable income will be attributable to the NIMCRUT, but as noted,  the NIMCRUT pays no income taxes as it is tax exempt.

Payout: The NIMCRUT is obligated to pay lesser of the unitrust amount, which can be as much as 11% for 20 years, or its fiduciary accounting income. Accordingly, the NIMCRUT trustee can pay out nothing,  as the NIMCRUT’s income will depend solely upon distributions that it receives from the LLC, of which the NIMCRUT is the sole member.

No UBIT: There will be no excise tax exposure for the NIMCRUT because the NIMCRUT does not receive any unrelated business income (UBIT).

Delay: There is no fiduciary accounting income to report until the LLC actually makes distributions out to the NIMCRUT, its sole member. The NIMCRUT trustee is then obligated to distribute to its trust beneficiary its fiduciary accounting income. Thus, by using an LLC ‘wrapper’ to hold the distributed IRA funds, it is possible to hold all those funds (initially derived from the inherited IRA) for up to 20 years, which could produce an very beneficial income tax deferral in the right situation.

Conclusion: The primary tax benefit provided by the use of a CRUT as an IRA beneficiary is that gains are tax-deferred for as long as they remain in the CRUT. The SECURE Act’s 10-year distribution rule, though, is essentially the default option to which the CRUT is being compared, which already provides some tax deferral at least for a decade. The question is whether a deferral of the income tax beyond that 10-year period is warranted under the IRA owner’s estate planning objectives. So too, there are risks associated with naming a CRUT as an IRA beneficiary. It can often take up to three decades or longer for the CRUT beneficiary to reach the breakeven point, and ‘catch up’ to an IRA  beneficiary who directly inherits the IRA via the SECURE Act’s 10-year distribution rule. Consequently, there is almost always a substantial mortality risk associated with the use of a CRUT to receive an IRA’s assets. There is, too, the additional organizational and operational expenses associated with maintaining a CRUT for a couple of decades. All these factors need to be considered before deciding to name a CRUT, or NIMCRUT, as the beneficiary of an IRA. But it is worth at least considering if a delay in the recognition of the IRA’s taxable income is important.