By Sarah Brenner, JD
Director of Retirement Education
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SECURE 2.0 expands qualified charitable distributions (QCDs) by allowing a one-time only QCD of up to $50,000 to a split-interest entity. As a result of this new rule, there is now a great opportunity to fund a charitable gift annuity (CGA) with a QCD.
To understand the new SECURE 2.0 provision allowing QCDs to split-interest entities, it is helpful to review the rules for QCDs generally, since these rules will still apply. Here are the basics:
- QCDs are only available to IRA owners or beneficiaries age 70½ and over and is capped at $100,000 (indexed for inflation) per person, per year. A QCD to a split-interest entity is capped at $50,000.
- QCDs are only available from IRAs, Roth IRAs and INACTIVE SEP and SIMPLE IRAs. A QCD cannot be done from any employer plans.
- Gifts made to private grant making foundations or donor-advised funds do not qualify.
- The funds must be directly transferred from the IRA to the charity.
- The charitable donation from an IRA can satisfy a required minimum distribution (RMD), but the IRA distribution is not includable in income.
- No deduction can be taken for the charitable contribution.
- For a married couple where each spouse has their own IRAs, each spouse can contribute up to $100,000 (as indexed) from their own IRAs.
- If more than $100,000 (as indexed) is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The excess is taxable income, and a charitable deduction can be claimed if the taxpayer itemizes.
- The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. There can be no benefit back to the taxpayer. (There is a limited exception for the new rule allowing QCDs to split-interest entities.)
- The distribution from the IRA to a charity can satisfy an outstanding pledge to the charity without causing a prohibited transaction.
- The charitable substantiation requirements apply. The donor must receive a CWA (contemporaneous written acknowledgment) from the charity (i.e., a receipt).
- QCDs apply only to taxable amounts. This is an exception to the pro-rata rule.
New Rules for QCDs to Split-Interest Entities
Prior to SECURE 2.0, QCDs could only be made to charities. They were not allowed to be made to split-interest entities. A split interest entity is a legal entity that allows a donor to receive a benefit during her lifetime or for a set term, with the remainder (anything left) benefiting a charity after the donor’s death.
Qualifying split interest entities include:
- A charitable remainder annuity trust (CRAT);
- A charitable remainder unitrust (CRUT); or
- A charitable gift annuity (CGA). To qualify the annuity must start fixed payments of 5% or greater not later than one year from the date of funding.
There are some significant limitations. A QCD to a split-interest entity can only be done once in a lifetime and is limited to $50,000 (as indexed for inflation). The split-interest entity can only be funded with QCDs — and no other funds.
A CRAT or CRUT is probably not a good candidate for a QCD. It is unlikely that it would be worth the cost and work to establish a new trust just for a $50,000 QCD. These trusts are expensive to set up and administer. However, using a QCD to fund a CGA is a strategy that may be attractive to many IRA owners. A good number of charities already offer charitable gift annuities. Now these can be funded with a QCD.