Take-Away:  The SECURE Act 2.0 expanded the use of a qualified charitable distribution (QCD) to include a transfer to a split-interest charitable entity. While this new charitable giving opportunity is somewhat limited, it can make sense if the QCD is use to purchase a charitable gift annuity (CGA).

Background: The SECURE Act 2.0 was amended to permit qualified charitable distributions (QCDs) from an IRA to split-interest entities like charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs.) However, due to the cost to set up and maintain a CRAT or CRUT, and the annual tax reporting requirements associated with charitable remainder trusts, it is probably not worth the time and expense to make a QCD to a charitable remainder trust. However, a QCD can be used to fund a charitable gift annuity (CGA), often only a simple one to two page contract, which may make sense for those individuals who are charitable inclined, who must take required minimum distributions from their IRAs, and who are concerned about out-living their money in retirement.

QCD Rules: There are several rules that must be complied with in order to make a qualified charitable distribution (QCD). A QCD is-

  1. only available to IRA owners, or beneficiaries of IRAs. A QCD is limited to a traditional IRA, a Roth IRA, and an inactive SEP or SIMPLE IRA.
  2. limited to those IRA owners or IRA beneficiaries who are over the age 70 ½.
  3. limited to $100,000 per IRA owner or inherited IRA beneficiary. The $100,000 limit is now indexed annually for inflation starting in 2024.
  4. is limited to $50,000 to a split-interest entity, i.e. a charitable gift annuity (CGA, more on this below.)
  5. cannot be made to a private grant-making foundation or to a donor advised fund.
  6. must be directly transferred from the IRA custodian to the charity, although the QCD check made out in the charity’s name can be delivered by the IRA owner/beneficiary to the charity.
  7. limited, in that there can be no benefit coming back from the charity to the donor.
  8. able to satisfy the donor’s outstanding pledges to the charity without constituting a prohibited transaction under the IRA distribution rules.
  9. subject to the charitable substantiation requirements, so that with a large QCD the donor must receive a contemporaneous written acknowledgement from the charity.

No Pro-Rata Rule: The QCD rules applies only to taxable amounts that are held in the IRA. This is an exception to the Tax Code’s pro-rata distribution rule  (informally known as the cream-in-the-coffee rule.) After-tax IRA contributions cannot be the subject of a QCD.

Split-Interest Limits: While a QCD can now be made from an IRA to a split-interest entity in which the IRA owner retains some interest, there are other limitations imposed by the SECURE Act 2.0.

  1. The amount as the QCD to the split-interest entity is limited, as noted above, to $50,000, which amount is indexed for inflation.
  2. The QCD to the split-interest entity is a once-in-a-lifetime opportunity. This is not a yearly opportunity to fund a split-interest entity. It is a one-time only opportunity.
  3. No other amounts can be contributed to the split-interest entity, i.e. no other funds or assets can be contributed to the CRAT, CRUT, or the CGA, when created, or made in future years.
  4. The beneficiaries of the split-interest entity are limited to the IRA owner/beneficiary and the IRA owner/beneficiary’s spouse. No other beneficiaries are permitted.
  5. The funds used to purchase the CGA are no deductible as a charitable income tax deduction (since the amount used is applied to the donor’s required minimum distribution obligation for the year.)
  6. The CGA must pay the donor an annual annuity of at least 5%  of the amount that was contributed to acquire the CGA.
  7. The annuity paid to the donor under the CGA cannot be assignable, which means that the donor cannot commute (early) his/her retained annuity interest by an assignment to the charity.

Compared to ‘Normal” Charitable Gift Annuities: A CGA contract involves two parties, the donor, who is also the annuitant, and the charity. A donor can either be a single person or the donor and another as annuitants, but as noted earlier, in order for the CGA to be funded using a QCD, the other person/annuitant must be the donor’s spouse. Unlike normal CGAs there is the maximum value of contribution imposed by the SECURE Act 2.0 of $50,000 and the minimum annual distribution annuity amount of 5% of the initial contribution. However, spouses could pool their QCDs and make a $100,000 contribution to a CGA, but $50,000 must come from each spouse’s IRA as the QCD. With normal CGAs the annuity amount is determined by the size of the donation, the donor’s age, and the prevailing interest rates. The American Council on Gift Annuities normally suggest maximum rates for a single-life annuity that most charities follow. The impact of increasing interest rates usually affects the purchase of a CGA. With normal CGA purchases, a larger charitable income tax deduction will be available to the donor; however, with a QCD purchasing the CGA there is no income tax deduction associated with the contribution to the charity, since the QCD satisfies part of the IRA owner’s RMD for the year. Consequently, there will be no income tax charitable deduction that is normally associated with an increase in prevailing interest rates when a QCD is used to acquire a CGA. Finally, unlike some CGAs that are funded with appreciating assets, since a CGA is funded with an IRA-sourced QCD, the entire annuity amount paid to the annuitant(s) will be taxed as ordinary income.

Tax Planning With QCDs: A QCD from an IRA can satisfy a required minimum distribution (RMD) obligation. Unlike other distributions from an IRA, there the QCD will not be included in the owner/beneficiary’s taxable income for the year. However, there will be no corresponding income tax charitable deduction with respect to the QCD. For a married couple, each of whom owns their own IRA, the couple can each contribute up to $100,000 (as indexed) from their respective IRAs to charity. If more than $100,000 (as indexed) is withdrawn from the IRA and contributed to charity, there is no carryover of the excess charitable contribution to a future year. If there is a QCD in excess of the maximum amount in the calendar year, then the donor must report the excess contribution as part of his/her taxable income and that excess amount might qualify as a charitable contribution deduction, but only if donor itemizes their deductions for the calendar year.

Conclusion: Charitable remainder trusts will not be funded with qualified charitable distributions, but a charitable gift annuity might be appropriate. Spouses, if qualifying under the QCD rules, could pool their funds and purchase a CGA with up to $100,000 for their joint lives. Whether it makes sense to take advantage of this new QCD-to-CGA opportunity depends on just how philanthropic the IRA owners, or beneficiaries, are in their support of a charity.