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SECURE Act 2.0’s Enhancements for the Charitably Minded

“The greatness of a community is most accurately measured by the compassionate actions of its members.” — Coretta Scott King

Chatter abounds in the world of finance law since the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 became law on December 29, 2022. Built upon the work that was started in the original SECURE Act of 2019, the sequel creates further enhancements that impact how individuals and families may prepare for the lives they envision in retirement, as well as how they navigate that dream once it is achieved.

Among the enhancements introduced in the bill are additional benefits for those retirees who are engaged in giving back to their communities through charitable gifts. Here are some new considerations that may help you increase the impact of your charitable donations.

Indexing of Qualified Charitable Distributions (QCDs)

Already in existence since the Pension Protection Act of 2006, Qualified Charitable Distributions (QCDs) have allowed taxpayers with IRA assets who attain age 70 ½ during the tax year (or older) to gift their annual Required Minimum Distributions (RMDs), or up to $100,000, directly to qualified charities as tax-free distributions that counted toward any RMD requirements. This feature became pointedly valuable in 2018 following the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, which significantly increased the standard deduction available to taxpayers, effectively eliminating the additional tax benefits of charitable giving for most taxpayers.

SECURE 2.0 has now added an automatic inflation-indexing feature to the $100,000 limit for QCDs starting with the 2024 tax year. With inflation being top of mind for taxpayers, this added feature will create a sustainable path for those most able to use their wealth to bless their communities.

Distribution Period and QCDs

The total distribution period for IRAs from start (by the original IRA owner) to finish (by inheritors of an IRA) has been significantly reduced, which will tend to increase the share of those distributions that goes to taxes.

The original SECURE Act started a trend of delaying RMDs from age 70 ½ to age 72; now, SECURE 2.0 further delays RMDs from age 72 to age 73 (for those born 1951 through 1957), or to age 75 (for those born 1958 or later). While the prospect of further deferral of taxes on IRA assets seems enticing, it could result in increased rates of tax as calculated RMDs would grow relative to tax brackets, resulting in higher rates of tax.

Further compounding this tax planning concern was the fact that the original SECURE Act had eliminated the stretch IRA, meaning inheritors of IRAs could no longer stretch distributions over their lifetimes to reduce the tax rates of the distributions; most Inherited IRAs must now be distributed within 10 years of the original IRA owner’s death, or even shorter in some cases.

For those retirees with charitable intent who have both traditional IRA and taxable investment accounts, QCDs just became much more attractive from a tax planning perspective as the source for making gifts to charities.

NEW! QCDs to Split-Interest Entities

Many charitable individuals and families wish to impact their communities through sizeable charitable gifts but wish to retain an income while they are living. Using the money to benefit both the charity and yourself as the donor is what is meant by “split-interest.” There are three primary ways to achieve this split-interest goal:

  1. Charitable Remainder Annuity Trust (CRAT): Regular income is retained by the donor, but the principal ultimately goes to the charity(ies) at death.
  2. Charitable Remainder Unitrust (CRUT): Regular disbursements of principal on a percentage basis is received by the donor, but the remaining principal goes to the charity(ies) at death.
  3. Charitable Gift Annuity (CGA): A gift is given up-front to a charity in exchange for a promised income stream to the donor from the charity.

CRATs, CRUTs, and CGAs are historically funded from taxable wealth for the rights to deduct charitable gifts while still retaining income benefits from assets. What SECURE 2.0 has done is allowed taxpayers a one-time election to fund either one of these split-interest entities with up to $50,000 from their IRA as a tax-free QCD. This benefit is offered to individuals with an IRA, so married couples with IRAs to support such could gift up to $100,000 using this strategy. In so doing, the investor realizes no tax on the IRA distribution, and income received back after the original gift is collected on a tax-advantaged basis, as well!

There are a couple of limitations for this use of the QCD in relation to these split-interest entities:

  • For CRATs or CRUTs, the income beneficiaries can only be the IRA owner and/or their spouse.
  • For CGAs, income payments must commence within one year of the original gift and must pay a minimum of 5% of the original gift per year.

While not right for everyone, these new options could prove valuable to many charitable taxpayers.

Smarter Compassion, Greater Impact

It is a most admirable intention to make our communities greater through compassionate gifts. With the right team incorporating the industry’s best-thinking, your charitable gifts can work harder for the causes most dear to your heart.

A heart of compassion makes a world of difference. A smart strategy makes that difference even greater.

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