SECURE Act 2.0 and Charitable Remainder Trusts

Jul 18, 2023 | Charitable Planning, IRS / Tax Guidance, Podcasts

“Secure Act 2.0 and Charitable Remainder Trusts,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Alvi Aggarwal, ACTEC Fellow from Fairfax, Virginia. So, beginning in 2023, IRA owners over the age of 70 1/2 are eligible to make a once-in-a-lifetime transfer of up to $50,000 directly from an individual retirement account, or IRA, to a charity for a charitable gift annuity, or a Charitable Remainder Trust. And the distribution from the IRA will be excluded from the owner’s taxable income. ACTEC Fellow Professor Christopher R. Hoyt of Kansas City, Missouri, is here with us today to explain how that works. Welcome, Chris.

Introduction to SECURE Act 2.0 and CRT Changes

Christopher Hoyt: Well, thank you very much, Alvi. And yes, for 15 years people have been able to make IRA gifts outright to charities, and now they can make a gift that’s partly to charity, partly to themselves. They can transfer money to a charitable gift annuity or a Charitable Remainder Trust (CRT). So, for example, if somebody is in their 80s and has to take out $60,000 as a required distribution, they could take $50,000 and transfer it to a Charitable Remainder Trust or get a charitable gift annuity, and just pay tax on the last $10,000. And then, the CRT or the charitable gift annuity would make payments to them for the rest of their life.

The charitable gift annuity or the CRT must be funded exclusively with the IRA funds. No other assets can be co-mingled and the beneficiary of this annuity or remainder trust can only be the IRA owner and that person’s spouse.

Limits to Funding Charitable Remainder Trust from IRA

Alvi Aggarwal: You mentioned a $50,000 upper limit. With that kind of limit, is a Charitable Remainder Trust a realistic possibility?

Christopher Hoyt: No, a $50,000 Charitable Remainder Trust is not economically viable. So, two observations: the first one is you can have a Charitable Remainder Trust benefit an individual and the spouse. And so, if the individual and the spouse have the same charity that they like, you could get up to $100,000, and some universities will offer Charitable Remainder Trusts with a $100,000 minimum. But as a practical matter, we’re only talking about charitable gift annuities until the law is changed. So, many of us view this law as a foot in the door that it will be expanded in later years with larger dollar amounts and maybe allowing co-mingling.

Qualification Requirements of IRA Owner

Alvi Aggarwal: So, what are the legal requirements that an IRA owner has to meet to qualify for this favorable tax treatment?

Christopher Hoyt: Alright, so let’s just run down the list.

  • First, the IRA owner has to be over the age of 70 1/2.
  • Second, you can only make these distributions from individual retirement accounts, you can’t make them from 401K or 403B.
  • And then, third, the distribution must be entirely taxable income. So, be careful if you have IRAs where you made a nondeductible contribution to the IRA, you only want to make the distribution from charitable income to taxable income.
  • Fourth, the Charitable Remainder Trust, if you have one, but more likely the charitable gift annuity, must consist of 100% of these taxable IRA distributions; you can’t co-mingle it with any other assets.
  • Fifth, you have to comply with all the charitable deduction laws. That is, to qualify for this exclusion, where somebody who has $60,000 and $50,000 goes into a Charitable Remainder Trust or CGA, they can exclude it from their income, and have to comply with all the charitable requirements.

And one of the really strict requirements the IRS is enforcing is you have to have a contemporaneous written acknowledgment from the charity. And normally, when we get these acknowledgments, they say you receive no goods or services.

When the IRA goes to the charitable gift annuity, it goes to the charity, and the charity sets up a gift annuity, then the charity has to say, “Thank you for your gift of $30,000, $40,000, $50,000, you received an annuity and the value the annuity is blank.” And then otherwise, you’d have a charitable deduction for the remainder of the interest. Not all charities offer these annuities. Most universities do, and then some of the national charities do, but the likelihood of a small charity is pretty small, that you’d have a charity comply.

Just a few quick observations, you can only do this once in your lifetime under current law; we hope to change that. So, pick the year you want, and in that year, the most you can exclude is $50,000 and the only beneficiaries that you can have of this gift annuity are the IRA owner and the IRA owner’s spouse.

Taxation of Annuity from Charitable Remainder Trust

Alvi Aggarwal: So, when the IRA owner receives distributions from this gift annuity or Charitable Remainder Trust, how are they taxed?

Christopher Hoyt: Okay, their tax is ordinary income, and there’s no chance of capital gain or anything like that that you could get with a conventional Charitable Remainder Trust or a, conventional charitable gift annuity, so it’s 100% taxable income. I should add there are two quirks in this rule,. The gift annuity must be non-assignable, and where that’s a problem is it’s common in gift annuity agreements where a charity says, “You know, if you want to support us, you can just cancel the payments and assign the annuity interest to us.” So, a charity should be careful drafting their gift annuity agreements for these IRAs and insert a provision in there it’s non-assignable.

We’ll clarify whether you can make a gift to a charity or not later, but right now, it doesn’t look like you can. The other little quirk is the charitable gift annuity has to pay at least 5%. Now, that’s not a problem right now. So, what are gift annuities paying? A couple of observations: first, they pay less than a commercial annuity because with a charitable gift annuity, part of your payment is a gift to the charity. But right now, if you’re 70 years old, you get 6% for the rest of your life, 80 years old, 7.6%, 85, 8.7% for the rest of your life; you easily pass the 5% threshold. If you’re doing it for two spouses, it’s about 1% less- like it’s 5.4% at age 71, at age 80 it’s 6.5% instead of 7.6%, and at age 85 is 7.7% instead of 8.7%.

But I want to warn you that right now, our interest rates are higher than they’ve been for the last few years, and in December of 2022, you could have a married couple of 73-year-olds that would fail the 5% test. If interest rates go down, you’ll want to monitor this.

Final Thoughts: One-Time Opportunity

Alvi Aggarwal: Wonderful. And do you have any final thoughts to share with us about this?

Christopher Hoyt: Well, I think the main appeal of this is just someone who really is charitably inclined; “I want to support this charity, but I also like the idea of getting a steady income for the rest of my life.” But right now, we’re not talking big dollars; with $50,000.00 getting 5%, 6%, 8%, we’re just talking about a transfer that will get you $2,000, $3,000, $4,000 a year for the rest of your life. But if you like that charity and you like the idea of having reliable income and you pick a reliable charity, this is going to be appealing. And I foresee, you know, expansion of this law in the future.

Alvi Aggarwal: Well, thank you, Chris, for explaining the contours of this planning opportunity, and I look forward to seeing what the future of this law holds.

Christopher Hoyt: Me too.


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