Case:

Quentin was the firstborn child in a large family. Throughout his childhood, Quentin’s parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best efforts in school, finding a rewarding job and increasing his savings. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could to maximize the benefit of his employer’s matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to invest in his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin realizes that at age 73 he will be taking required minimum distributions (RMD) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin would like to use his IRA to leave a lasting legacy but is worried about outliving his retirement fund as his family has a history of long life. Quentin would like to use his RMD creatively to make a charitable gift with income for his lifetime.

Question:

Quentin has discussed charitable remainder trusts (CRTs) and charitable gift annuities (CGAs) with his professional advisor in the past, and he is curious whether one of these life income arrangements might be beneficial in his circumstances. Is Quentin permitted to use an IRA charitable rollover gift to fund a CRT or CGA?

Solution:

The SECURE 2.0 Act took effect in 2023 and modified Sec. 408(d)(8). It indexed the IRA charitable rollover limit to $105,000 this year for direct transfers to charity from IRA owners age 70½ or older. The IRA gift limit will be adjusted for inflation in future years. The SECURE 2.0 Act also expands IRA gifts to allow one-time funding of CRTs and CGAs up to $53,000 this year. The income payments from the CRT or CGA would be fully subject to tax. The lifetime income must benefit the IRA owner, the IRA owner’s spouse or both. Additionally, there is no charitable tax deduction, the income interest must be non-assignable and the minimum payout is 5%.

With a direct transfer, the entire distribution transferred to the charity must qualify for a Sec. 170 charitable deduction. Sec. 408(d)(8)(C). The donor may not receive anything of value in return for the qualified charitable distribution (QCD), except for the lifetime income from the CRT or CGA. The lifetime income option is a single tax year election. Once the donor elects to use this option, the donor is not eligible to do it again in a future year even if the limit increases beyond what was elected in a prior year.