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Turn IRA assets into charitable contributions

New legislation may affect your philanthropic strategy.

Donations are more crucial than ever. In response to recent natural disasters, global inflation, war and a worldwide pandemic, givers stepped-up and expanded the charitable landscape. And now, the SECURE Act 2.0 could bring about a fresh shift in generosity thanks to its new incentive for charitable giving.

Since 2006, philanthropically inclined IRA holders who are 70 1/2 or older have been able to transfer up to $100,000 each year directly from one or more IRAs to qualified charities without being taxed on the withdrawal. The donation is classed as a tax-free qualified charitable distribution or QCD.

Signed into law last December, the SECURE 2.0 Act incentivizes charitable donations by expanding the QCD rules. First, beginning in 2024, the $100,000 annual IRA QCD limit will be indexed for inflation. Within that annual QCD limit, you can now make a one-time-only distribution of up to $50,000 (also indexed for inflation) from one or more IRAs to a qualified “split-interest” entity – in this context, a charitable annuity trust (CRAT), charitable remainder unitrust (CRUT) or charitable gift annuity (CGA).

At first glance, the new split-entity QCD provision may appeal to tax-conscious donors who’d like to continue generating income from their donated assets. However, several critical caveats apply, so consult your team of professionals to understand the requirements and tax implications fully.

Three types of split-interest entities

Charitable remainder annuity trust (CRAT): The CRAT empowers you to fulfill your philanthropic intentions while capitalizing on immediate tax savings, and it provides a steady income for an extended period. You (or your beneficiaries) receive a fixed amount each year, and the remainder of the donated assets go to your chosen charities. To qualify within the new split-entity QCD provisions, the CRAT must be funded exclusively by QCDs, and the only income beneficiaries can be you, your spouse or the two of you.

Charitable remainder unitrust (CRUT): The CRUT also allows you to take advantage of immediate tax savings and provides income for you or your beneficiaries. The CRUT shares the same stipulations as the CRAT. It differs only in that the annual distribution is a set percentage of the trust, between 5% and 50%. Your named charities get the remainder.

Charitable gift annuity (CGA): Many large nonprofits offer charitable gift annuities. You donate to a single charity, which is set aside and invested. You get immediate tax savings and a fixed monthly or quarterly payment from the charity (supported by the investment account) for the rest of your life. At the end of your life, the charity receives the remainder of the gift. As with the CRAT and CRUT, the CGA needs to be funded exclusively by QCDs; fixed payments must exceed 5% of the contributed amount and begin within one year.

Other ways to contribute

There are other ways to use your IRA to make a difference to charities. From an estate planning perspective, consider putting your favorite charities as beneficiaries of your IRA.

Or you can name a donor advised fund (DAF) as the beneficiary of your IRA and list your children, grandchildren or both as DAF advisors to reap the tax benefit of the donation while empowering your heirs to make grants from the DAF. This is one way to help your legacy live on.

A QCD could be a smart strategy to enhance your giving and win significant tax savings. Of course, it’s wise to take a holistic look at your entire estate and determine which assets you should leave to charities and which to your heirs, and then consider which strategies best fit your intentions. Talk to your advisor to learn about your options and how to take advantage of the SECURE 2.0 Act provisions.

Sources: fidelitycharitable.org; charitynavigator.org; irs.gov; forbes.com