New Charitable Giving Strategies for Retirees

New this year, charitably inclined individuals that are aged 70.5 or older can capture additional tax-friendly charitable-giving opportunities using a Qualified Charitable Distribution (QCD). The SECURE Act 2.0 expanded the QCD rules to allow transfers from an IRA to certain split-interest agreements with not-for-profits. The split-interest agreements include Charitable Remainder Trusts and Charitable Gift Annuities. In these agreements, the donor contributes money from an IRA in exchange for a lifetime annuity. Below, we discuss the pros and cons of these arrangements, and who might want to explore this new option.

How Do You Use a Qualified Charitable Distribution (QCD)?

A QCD allows an IRA owner to gift to charity tax-efficiently regardless of whether that person itemizes or claims the standard deduction. Available only after turning 70.5, a QCD is a direct transfer from an IRA to a qualified charity. The distribution from the IRA to charity, up to $100,000 per year, is excluded from your income. For more, see Can I Do A Qualified Charitable Distribution From My IRA?

What Changes Are Happening to QCDs?

The SECURE Act 2.0 modifies QCD rules by providing a one-time opportunity to fund a Charitable Remainder Trust (CRT) or Charitable Gift Annuity (CGA) beginning in 2023.

What Are the Specific Rules for this One-Time Opportunity?

• The maximum amount that can be moved is $50,000 per person in a single year (to be adjusted for inflation after 2023).
• The $50,000 counts toward the overall $100,000 QCD maximum limit.
• No additional transfers are available in future years, even if the original balance transferred was less than $50,000. This is a once during lifetime opportunity.
• The Charitable Remainder Trust can only be funded with the QCD and no other outside assets.
• Existing Charitable Remainder Trusts cannot receive the QCD.
• The income beneficiaries can only be the IRA owner and spouse (no children or other heirs).

Is It Worth Setting Up a Charitable Remainder Trust?

A CRT can be an effective tool for converting assets into income while deferring capital gains tax on appreciated assets. However, it seems unlikely that the time and cost of setting up and administering a new CRT will be worthwhile specifically for this new QCD strategy.

How Can I Benefit from a QCD to Life Income Plan?

While a new Charitable Remainder Trust has limited appeal under these provisions, a Charitable Gift Annuity may be a better choice to consider. Charitable Gift Annuities are established and operated by non-profits, and therefore do not have the same legal or accounting costs that one would incur if creating a CRT. If you have used QCDs in the past, it is possible a Charitable Gift Annuity is available from some of the charities you already know.

Who Offers Charitable Gift Annuities and Where Can I Find Them?

Charitable Gift Annuities are most often available from larger non-profits, such as academic institutions and medical or religious affiliated groups. You can reach out to the charities you prefer with an inquiry and use this member search (www.acga-web.org/member-organizations#/) from the American Council on Gift Annuities.

Is There a Minimum to Contribute to a Charitable Gift Annuity?

There is not a required minimum by law, but most institutions begin at $10,000 or above. Under the new regulations, the maximum is $50,000 per person when using a QCD. You could elect multiple CGAs that add up to $50,000, but only over the course of one tax year. You would not be able to use the new QCD rule to fund a CGA with $10,000 in one year and then $10,000 the next year.

If I Fund a Charitable Gift Annuity with my QCD, What Income Should I Expect?

The new law states that payments begin no less than 1 year after funding and must be at a fixed rate of 5% or greater. The actual rate you receive will depend on how old you are and whether you elect for the payment to be for your life only or for joint and survivor with a spouse. As an example, the current single life rate recommended by the American Council on Gift Annuities for a 75-year-old is 6.6%; meaning a QCD of $10,000 would result in $660 of annual income for the life of the annuitant.

Are the Annuity Payments from a Charitable Gift Annuity Tax-Free?

No. If you use a QCD to fund a CGA, the amount you donate is excluded from your taxable income in that year. The annuity income you receive going forward is taxable. You could still realize a material tax benefit if the donation allows you to spread income from a high tax year into multiple lower tax years.

What Other Tax Benefits Could I Capture?

In a year with above average income, for example from a taxable home sale or other realized capital gains, the strategy might help lower the impact of the net investment income tax, Medicare premium surcharges, or the amount of Social Security income that is taxable.

Did the SECURE Act 2.0 Change Anything About QCDs and Donor Advised Funds?

No. Unfortunately, Donor Advised Funds are still not eligible to receive transfers from QCDs.

What Else Should I Keep in Mind with My Charitable Giving Plans?

Even if you don’t gain much benefit from tax rate arbitrage, you may still enjoy the QCD to CGA idea to both help a charity and receive some income in return. For more ideas, reach out to Heritage Financial to discuss your particular circumstances, and see What Issues Should I Consider When Establishing My Charitable Giving Strategy?

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