SECURE Act 2.0 Offers New Opportunity for Charitable Gift Planning

SECURE Act 2.0 Offers New Opportunity for Charitable Gift Planning

The 2022 Secure 2.0 Act signed into law, December 29, 2022, provides a onetime election for qualified charitable distributions (QCD) of $50,000 (increased annually for inflation) from one’s IRA in return for an annuity. In essence it allows for a one-time election to a “qualified charitable entity” of a gift annuity (CGA) if such annuity is funded exclusively by a QCD and commences fix payments of 5% or greater not later than one year from the date of funding.

The origin of the election is under IRS code section 408, “Individual Retirement Accounts”. Section 408 was amended by the Secure 2.0 Act to allow this one-time election.

What are the requirements?

• The Donor must be age 70 1/2 or older;
• The distribution/contribution QCD must be from his or her IRA account;
• The gift must be to a qualified charitable entity.

The QCD is tax neutral for federal tax purposes; meaning you do not have to report the distribution/contribution as income, but the distribution/contribution is not eligible for a charitable deduction; (state laws, however, may vary).

All payments from a CGA will be taxed as ordinary income. The key point is that the CGA counts towards one’s Required Minimum Distribution (RMD) but does not count as income for federal income tax purposes thus reducing the RMD in the year the gift is made.

The income from the CGA is paid for life, or for the life of the donor and his or her spouse. Note: Payments to children or others are not allowed.

Individuals who are age 73 (younger in prior years), must take their RMD every year.  By making a CGA they receives the benefit of not having to pay tax on the QCD amount and since they do not receive it and the CGA does not count as income. Additionally, their Medicare premium will decrease somewhat because they will have less income.

The typical annual payout for $50,000 gift annuity is:

• 70 (5.9%)
• 75 (6.6%)
• 80 (7.6%)
• 85 (8.7%)
• 90+ (9.7%)

Source: American Council on Gift Annuities | Note: Suggested maximum rates as of Jan. 1, 2023, for single​life 65 years old ​(5.4%)

The law still provides for charitable gifts from retirement accounts for up to $100,000 per year but there is no annuity portion. It’s simply a gift that would reduce one’s RMD.

This new feature under the Secure Act 2.0 enhances charitable giving especially because the federal estate tax exemption has increased dramatically to almost $13 million per individual. As a result, there’s less of an incentive for even wealthy people to make charitable gifts as their estates may not be subject to federal estate tax and their property, which otherwise would be taxed @ 40% was often donated to a charitable entity (think Bill Gates and Warren Buffet).  With the dramatic increase in the federal estate tax exemption, wealth now passes to the children with an increase in basis, equal to fair market value at the death of the owner.

Retirement accounts do not receive an increase in basis on the death of the owner, since they are considered to be “income in respect of a decedent” IRC 691, and therefore there is no step up in basis. Consequently, making a gift from the retirement account would be the better choice since owners who receive their parents’ retirement account have the same basis. The principle when withdrawn is income which must be taken out over 10 years. The Secure 2.0 Act features enhance the motivation for someone to make a charitable gift with retirement accounts that otherwise would not be made.

Additionally, it’s important to note that the secure Act 2.0 legislation only applies to Individual Retirement Accounts (IRA’s). The amendment was to IRC sec. 408 -IRA’s. Conspicuously absent is the ability of holders of 401K, 403B, thrift plans, etc. to make similar gift annuities. Why these were excluded is probably because like all legislation it was rushed through at the very end of the year. There are many retired and working 70 ½ year olds that may want to make a gift annuity from their 401K’s, 403B’s, etc. but they can’t. Perhaps exempt organizations, i.e. Universities, Hospitals, etc. need to have congress address this issue?

This Memorandum has been prepared for the general information of colleagues, clients and friends of the Firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Frank Brunetti, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.