Individuals must receive annual required minimum distributions (RMDs) out of their retirement plan or IRA when they reach age 73 or older (this age will be increased to 75 in future years). For some taxpayers, the RMDs will bump them into a higher tax bracket and cause the taxpayers to be taxed at a higher tax rate. However, individuals age 70 ½ or olderare allowed to make tax-free QCDs of up to $100,000 directly from their IRAs to a qualified public charity (generally, a public charity other than a donor advised fund). These amounts will not be taxed and will not be included in adjusted gross income (AGI).
Recent legislation has added a provision that allows taxpayers to make a one time qualified charitable distribution of up to $50,000 to a qualifying charity through a split-interest entity. A split-interest entity is defined as (i) a charitable remainder annuity trust (CRAT) under which the trust distributes a fixed amount to the non-charitable beneficiary, (ii) a charitable
remainder unitrust (CRUT) under which the trust distributes a fixed percentage of the asset value of the trust to the non-charitable beneficiary, and (iii) a charitable gift annuity in which the charity pays an annual fixed amount to the donor in exchange for the contribution.
As a practical matter, because the high cost of creating and maintaining a trust makes it economically unfeasible to use a CRAT or a CRUT, I will focus on using a charitable gift annuity. Although there are a number of requirements that must be satisfied in order to qualify, I will highlight only the requirements that are likely to affect the substance of the
transaction.
- The annuity must be funded exclusively by QCDs and must commence with fixed payments of 5% or greater not later than one year from the date of funding.
- If the distribution were not a QCD, it would have been deductible up to the amount of the distribution minus the value of the annuity. This effectively limits the value of the annuity relative to the QCD. The value of the annuity and the remainder interest is determined under IRS interest rates and actuarial tables.
- Only the individual and his or her spouse may receive the annuity distributions and the distributions are nonassignable.
The result of this alternative is that the individual foregoes the $50,000 RMD, which would otherwise be taxable ordinary income, and instead receives a stream of annuity payments with a total actuarial value that is less than the $50,000 amount. The annuity payments are included in income over the annuity period, resulting in a significant deferral of tax. The exact structure of the annuity period, such as whether the payments are to be received over your life or a period of years is up to the individual (provided that the value of the annuity relative to the QCD doesn’t exceed the statutory requirements). A disadvantage of this alternative is that, unlike regular retirement plan distributions, the annuity payments may be subject to the 3.8% net investment income tax.
If you would like to discuss this plan, please call.