Many people believe the Tax Cuts and Jobs Act will reduce charitable giving, because it reduces the tax incentives for giving.
They’re wrong, for two reasons. One reason is that most Americans don’t base their giving on the tax benefits. The other reason is the tax law simply changed the tax-wise ways of giving. Americans will learn and adopt new strategies.
One good way to give under the new law is the donor-advised fund, which I discuss in one of this month’s Tax Watch articles. Another good way to give is through your IRA.
A good strategy, as I’ve said for several years, is for people to make more of their charitable gifts through IRAs. That’s even better advice now.
There are several strategies that can provide multiple benefits for making charitable gifts through your IRA. Some can be used for lifetime gifts, while others are for gifts made after
you pass away.
Avoiding the RMD Burden
A good way to make routine lifetime charitable gifts when you’re liable for required minimum distributions (RMDs) is with the qualified charitable distribution (QCD).
The QCD has been in and out of the tax law since 2006 but was made permanent at the end of 2015.
Normally when a charitable contribution is made from an IRA, the owner is treated as taking a distribution included in the owner’s gross income, whether the money was distributed to the owner or was transferred directly to the charity. The owner might receive a charitable contribution deduction to offset the income, but that is less likely under the new tax law.
The QCD provides special treatment to anyone age 70½ or older. The distribution isn’t included in the IRA owner’s gross income, yet it counts toward the year’s RMD. No charitable contribution deduction is allowed, even if the IRA owner itemizes expenses.
The QCD can be used for up to $100,000 of charitable contributions each year. The QCD can exceed the RMD for the year and still receive the special treatment, up to the $100,000 annual limit.
The $100,000 limit is per taxpayer. When a married couple files jointly, each spouse can have up to $100,000 QCDs annually, provided he or she qualifies separately. The limit can’t be shared or transferred between spouses.
You must be at least age 70½ at the time of the charitable distribution for it to qualify as a QCD. Distributions made before you’re 70½ aren’t QCDs.
The contribution must be made directly from the IRA custodian to the charity. Or you can receive a check that is made payable to the charity and deliver that check to the charity.
A QCD can be made only to a public charity, not a private foundation or donor-advised fund. More details about QCDs are in our May 2016 issue.
The Triple Benefit Trust
A Charitable Remainder Trust (CRT) provides income for life to you or a loved one, a current income tax deduction and eventually a contribution to charity.
To use a CRT with an IRA, you take a distribution of all or most of a traditional IRA. The distribution is included in gross income. You transfer all or most of that distribution to a CRT. You and your spouse receive annual distributions from the CRT for the rest of your lives. After you both pass away, the charity receives what’s left in the trust.
You receive a charitable contribution deduction in the year you transfer the money to the trust. The amount of the deduction depends on current interest rates and your age, plus the amount contributed to the trust.
We discussed CRTs in detail in the past, such as the December 2017 issue. The CRT strategy can reduce lifetime taxes on the IRA, maximize your income tax deductions for charitable
giving, ensure lifetime income and help the charities of your choice.
Enhancing Your Legacy
Remember, when beneficiaries inherit a traditional IRA, they pay taxes on the distributions just as the original owner would have. They’re really only inheriting the after-tax value of the IRA. They’re better off inheriting other assets, because they can increase the basis of those assets and sell them tax free. They also receive tax-free cash and assets without appreciation.
Unfortunately, many people make their posthumous charitable contributions using the estate’s cash or other assets instead of an IRA.
Everyone is better off when your posthumous charitable contributions are made using a traditional IRA. You do this by naming the charity a beneficiary of the IRA. The charity receives the distribution and doesn’t have to pay taxes on it. Your estate and heirs also don’t have to pay taxes on the distribution. If your estate is subject to the federal estate tax, the IRA will be included in the estate and increase that tax bill, but there will be a charitable contribution deduction for the amount of the IRA distributed to the charity.
Your heirs inherit other assets in the estate that in a traditional plan would have been contributed to the charity.
Your heirs are better off and the charity is at least as well off when posthumous gifts are made through a traditional IRA. When you don’t want to leave an entire IRA to charity, split
your IRA so that there’s a separate IRA with the charity as the sole beneficiary. Or you can name the charity as co-beneficiary and use a provision that limits the percentage or dollar amount the charity inherits.
Income for Your Heirs and Charity
The CRT also can be used effectively to provide income for your children or other loved ones and also to benefit charity.
You name the CRT as beneficiary of the IRA. After you pass, the IRA will be distributed to the CRT, and no income taxes will be due on the distribution. The CRT will pay income to your children or other beneficiaries you named for life or a period of years, whichever you selected. After the income period ends, the charity receives the remainder value of the trust.
The IRA will be included in your estate for tax purposes. The estate will receive a charitable contribution deduction for the value of the IRA the charity eventually will receive.