Planned Giving II
October 2017
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In our previous article on “planned” giving, we introduced several charitable gifting ideas, namely, direct donations, charitable bequests, and charitable gift annuities. However, there are even more unique strategies that believers can use to bless the work of God.
Qualified Charitable Distributions
Many Americans have Individual Retirement Accounts (IRAs), which typically serve to hold tax-deferred retirement funds. When an IRA account owner reaches the age of 70.5, the Internal Revenue Service (IRS) requires that a minimum amount be taken out of the IRA account each year. This Required Minimum Distribution (RMD) is taxed as income by the IRS upon distribution.
In 2015, Congress permanently instituted something called a Qualified Charitable Distribution (QCD). The QCD rule simply permits taxpayers to make IRA distributions directly to a public charity without treating the distributions as taxable income. Any IRA owner who is over the age of 70.5 is eligible to make a QCD.
There are several important but simple qualifiers:
- The owner of the IRA must be at least age 70.5 at the time of the distribution.
- The distribution must go directly to a public charity (not a donor-advised fund or private foundation).
- The distribution must come from an IRA. Distributions from a 401(k) or 403(b), or other corporate sponsored retirement plans, are not eligible.
- There is no minimum QCD amount, but there is a $100,000 limit per individual taxpayer. Note that with a married couple, both over age 70.5, each qualifies for the $100,000 limit, so they would be able to use up to $200,000 in aggregate.
Notably, when an IRA owner makes a QCD, the distribution goes directly to the charity and not to the donor first. Therefore, the amount of the distribution never gets reported as income and is not added to adjusted gross income (AGI). This exceeds the benefit of taking a distribution personally and then donating it to your charity of choice. When using this strategy, you may reduce your income tax exposure in many ways. We recommend that you speak to your income tax advisor to see how a QCD benefits you and your gifting needs.
Charitable Remainder Trust
A Charitable Remainder Trust (CRT) is an irrevocable trust that provides benefits for two sets of beneficiaries. The donor receives the initial benefit of an income tax deduction and a lifetime income stream. The second beneficiary receives the remainder of the value of the trust after the income beneficiaries either pass away or fulfill the time frame of the trust.
Here’s how a CRT works: Donor transfers property to a CRT. Property can be cash, stocks, bonds, mutual funds, and other property subject to certain private foundation rules.
CRTs are designed to supply an income stream for the donor’s lifetime, and if married, for the lifetime of the surviving spouse.
The donor may receive an income tax deduction when the trust is funded. The deduction is a percentage of the value of the property donated to the trust. It is important to note that the deduction is based on the present value of the future gift to the charity.
After the death of the income beneficiaries, the remainder of the trust is distributed to the charity or non-profit organization designated in the trust.
There are several benefits to using a CRT. If you are charitably inclined, a CRT may provide an opportunity to improve investment diversification, increase cash flow, and avoid capital gains and estate taxes on the donated assets. Funding a CRT will typically reduce your estate tax obligation because assets in the CRT are removed from your estate.
Irrevocable Life Insurance Trust (Wealth Replacement)
To reiterate, once a Charitable Remainder Trust has been established, and assets/property have been transferred into the trust, a stream of income can be produced. In essence, the donor who has made the gifts can now begin to receive income from that same trust. One use for that income could be to fund a different and separate trust, known as an Irrevocable Life Insurance Trust (ILIT). Now, not only has the donor created both a legacy gift and an income stream by transferring assets/property to the Charitable Remainder Trust, he has also created more wealth through the use of the ILIT. As the name implies, the Irrevocable Life Insurance Trust holds a life insurance policy on the donor’s life. Upon the donor’s decease, the remainder of the assets in the Charitable Remainder Trust would be distributed to the named charity/non-profit, and the life insurance beneficiaries would receive the death benefit proceeds on a tax-free basis from the Life Insurance Trust. If the donor desires to, he can name the charity/non-profit as a beneficiary on the life insurance policy, as well, effectively making an additional charitable gift upon his death. Please note that age, health, etc., are factors in the successful implementation of this strategy. Establishing these trusts involves tax and legal aspects, so it is essential to work closely with an attorney, CPA, and financial advisor.
These strategies are somewhat complex at first glance, but they should be viewed as tools with which someone can build a structurally-sound legacy gifting plan. Being a good steward involves much prayer and consecration, as well as seeking out the practical means of accomplishing things. Receiving the talent is one thing; burying that talent to preserve it is another thing. Then there is the idea of using the talents wisely to multiply and create more than what was started with, which will please the Lord and further His glorious work.
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