By Ryan Paul, CPA

Starting this year, taxpayers have another tool in their charitable giving toolbox.

SECURE 2.0 created the Legacy IRA, giving taxpayers aged 70 ½ or older the ability to distribute up to $50,000 from their traditional IRA into a Charitable Gift Annuity (CGA). If made, this distribution will be excluded from income and will qualify as part or all of a required minimum distribution (RMD) for taxpayers age 73 or older.

Legacy IRA rules kicked in on January 1, 2023. As part of the tax strategy, a charitable gift annuity can accomplish several goals for certain taxpayers.

What is a Charitable Gift Annuity?

This type of annuity is outlined in IRC code section 501(m)(5). Under this arrangement, the nonprofit or charity will agree to pay the donor a fixed income sum for their lifetime. When the donor dies, the income annuity will cease and the remaining principal will go to the charity as noted in the original CGA contract.

With regard to the assets, the charities or charity will accept and invest contributions from many CGAs.  The charitable organization would then handle recordkeeping, management, investment, and distributions to beneficiaries.

Why Consider a Charitable Gift Annuity?

A CGA provides a unique opportunity for taxpayers to support charities of their choice and fulfil their philanthropic desires now while also receiving an exchange of fixed recurring payments for life.   Donors can utilize the Qualified Charitable Distribution (QCD), which will allow for exclusion of the donated amount from income.

This donated amount will count as part of the taxpayer’s RMD – a win-win. Depending upon the adjusted gross income level, this tax tool may help to avert the net investment income tax surcharge of 3.8 percent.

Another consideration is for those age 65 and older. IRMAA is the income-related monthly adjustment amount paid on top of the Medicare Part B and Part D premiums if annual income is above certain thresholds. If a taxpayer is approaching a certain income level, Medicare premiums will increase. This fee is based on the modified adjusted gross income on the tax return (which includes tax-exempt income). If the modified AGI exceeds a level of an IRMAA bracket, even by $1, the premiums will be higher.

This planning should be considered as part of overall tax saving strategies.

Key Facts to Consider

As taxpayers consider taking advantage of this new gifting tool, it helps to be aware of this new law’s rules and other requirements and Charitable Gift Annuities.

The legislation was drafted to allow only a one-time QCD in exchange for a Charitable Gift Annuity.  This “one and done” feature will require some thoughtful planning to help maximize the benefit. The maximum amount that a taxpayer can contribute is $50,000. Most charities require at least $10,000.

This type of legacy IRA strategy will work best for CGAs, but they also can be distributed into a charitable remainder trust. While this is possible, we see most taxpayers utilizing the CGA.

Here’s why: charitable remainder trusts (CRTs) cannot hold other assets. If the CRT will only hold $50,000 or even $100,000 if both spouses contribute, then it will be more of a challenge to administer this in an economically practical way. Most CRTs are funded with at least $100,000.

The CGA, on the other hand, will provide for an annuity using untaxed principal.

The annuity payments will depend upon the donor’s age at the time of the gift. The gift annuity must be paid out at a rate of at least five percent as directed by the American Council on Gift Annuities (ACGA).  The rate for annuitants older than 70 should exceed the five percent minimum as recommended by the ACGA.

However, there are many charities that set the minimum age to 60 years old for income recipients. As well, the annuity can make payouts to someone other than the donor as long as they meet the minimum age requirements.

Income from the annuity is taxed to the beneficiary at ordinary income tax rates.

Final Thoughts

SECURE 2.0 has provided taxpayers and their tax advisors a shiny new tool to use as part of their tax mitigation strategies. It may provide a great opportunity for some taxpayers to reduce their income taxes (and possibly lower their IRMAA premiums) while still receiving income from the asset during the remainder of their life. A strategy should be employed being mindful of age, charitable intent, and timing to minimize tax as much as possible.

To learn more, contact PBMares Tax Partner Ryan Paul, CPA.