Written by Justin Farrell and David Wheeler Newman

The Secure Act 2.0, signed by the President on December 29, opens new opportunities to fund charitable gifts with IRA distributions. The first change is to index for inflation the cap on qualified charitable distributions (QCDs) from IRAs to charity, which has been stuck at $100,000 since the “IRA rollover” was first introduced. (Indexing begins in 2024.) But the real news is that, for the first time, QCDs are allowed to fund life income gifts. The charitable sector has been lobbying Congress for years to allow IRA distributions to fund charitable remainder trusts (CRTs) and charitable gift annuities (CGAs), and Congress finally came through in the Secure Act 2.0.

The Act expands the definition of QCDs to include one-time distributions to create charitable life income plans, CGAs and CRTs. We think the real opportunity for charitable gift planners lies with CGAs, not CRTs.

First a quick refresher on the basic CGA requirements:

(i) The annuity is the sole consideration issued in exchange for the donated property;

(ii) At the time of the gift, the present value of the CGA is less than 90% of the value of the donated asset;

(iii) The CGA is payable over the life or lives of one or two individuals;

(iv) The GGA does not guarantee a minimum or specify a maximum number of payments; and

(v) The CGA does not provide for an adjustment of the amount of the payments by reference to the income from the donated property. 

The new legislation for the first time allows a CGA to be funded with a distribution from an IRA to the charity issuing the CGA.  This is a major opportunity for charities that issue CGAs, due to the huge portion of the wealth of older Americans held in IRAs, as well as for donors that own those IRAs since they can use a portion of their retirement savings to benefit the charities they support, with a portion of their retirement income securely backed by the assets of those charities.

The new law imposes strict requirements that must be followed for the distribution from an IRA to charity to fund a CGA to be treated as a QCD:

• The IRA owner funding the CGA must be at least 70.5 years old, and the CGA must qualify under the normal rules summarized above.
• The transfer is one-time only, up to $50,000 in a single year (indexed for inflation, beginning in 2024).  So, a donor can transfer amounts less than $50,000 in a year, then add more in the same year.  But no additional transfers are available in future years even if the balance is less than $50,000.
• All payments by the CGA funded with the QCD must be fully taxable at the recipient’s ordinary income tax rate.  There is no possibility of tax-free payments or income taxed at the capital gain tax rate from the CGA.
• Only the IRA owner and his or her spouse may receive payments from the CGA funded from the IRA (no payments are allowed to children or others).
• Spouses can each contribute up to $50,000 from their respective IRAs to a single $100,000 joint-life CGA.
• The QCD may not fund a deferred charitable gift annuity.
• The CGA funded with a QCD must be non-assignable.
• A CGA funded by the new QCD must have a payout rate of at least 5%.

Gift planners need to watch out for this last requirement in the case of a two-life CGA for spouses.  With a one-life CGA, the 5% minimum payout rate won’t be a problem for charities using the rates recommended by the American Council on Gift Annuities (ACGA), since the IRA owner (and CGA annuitant) must be at least 70.5 years old.  But if an IRA owner that age or older funds a two-life CGA for herself and her significantly younger spouse, it could be that the recommended annuity rate is less than 5%.  Before getting too far into the planning for spouses with this age differential, it is best to check the ACGA recommended rates, available here.

The new legislation has similar rules for QCDs funding CRTs.  But due to the relatively small size of a qualifying CRT to which no further additions may be made — $50,000 or $100,000 if both spouses join in funding the CRT from their respective IRAs – which is substantially less than the average size of most CRTs, we don’t think the opportunity for CRTs is nearly as important as it is for CGAs.