Funding a Charitable Gift Annuity from an Individual Retirement Account (IRA) Using the Qualified Charitable Distribution

bryan-taylor

Donors have been asking for years if a charitable gift annuity can be funded from an Individual Retirement Account (IRA). Until Congress passed the SECURE Act 2.0 of 2022, the donor would have to take an IRA distribution, pay the taxes on the distribution, and then fund a gift annuity with the IRA distribution proceeds. A charitable deduction would be given, and a portion of each annuity payment would be tax-free. However, with this newer legislation of the SECURE Act 2.0, charitable gift annuities can now be funded with a Qualified Charitable Distribution (QCD) directly from an IRA. Under the legislation, this arrangement is referred to as a Legacy IRA.

A QCD allows individuals who are at least 70 ½ years old to donate up to $100,000 total per year to one or more charities directly from his or her IRA. QCDs count toward the required minimum distribution (RMD) that the IRS requires at age 73. The IRA cash distribution goes directly to the charity, so there is no tax liability to either party.  Donors do not report QCDs as taxable income and do not owe any taxes on the QCD. However, because a QCD is excluded from taxable income, these gifts are not tax-deductible. 

 After the passing of SECURE ACT 2.0, a donor can now include in his or her QCD a one-time gift of up to $50,000 to a split-interest planned gift, such as a charitable gift annuity (CGA) or charitable remainder trust (CRT). The requirements of funding a CGA from the donor’s IRA using a QCD are as follows;

  • Donor must be 70 ½
  • Only the donor and the donor’s spouse can be annuitants
  • It must be an immediate charitable gift annuity (not deferred, not commuted and not a flexible deferred)
  • No charitable deduction is available to the donor but the QCD is not reported as taxable income either
  • All of the annuity payments are fully taxable as ordinary income.
  • The annuity is non-assignable even to the charity; payments must continue for the annuitant’s lifetime
  • The donor must complete all of the IRA QCD funding of the annuities in one year – up to $50,000 as a lifetime amount – it can be split among different charitable organizations. The $50,000 limit will be indexed for inflation, starting in 2024.
  • The IRA QCD will not be an immediate taxable event and the QCD counts towards the RMD for the year if donor has not used his or her RMD total for the year and the donor is 73 or older

An additional requirement surrounding Legacy IRA QCD funded gift annuities is that certain states require pre-approval of these new gift annuity agreements. The state registration team at Cornerstone Management has been working proactively to get our clients’ IRA QCD funded CGA agreements filed with the respective states where they are registered. According to PG Calc, the following nine states require pre-approval by their state’s insurance department– Alabama, Arkansas, California, Maryland, New Jersey, New York, North Dakota, Tennessee, and Washington.

Each state has its own system of submission which vary in level of difficulty. Most states simply require you to email the state your sample contracts for their records, but other states require approval. Although some states are granting approval in the same week the sample contracts are submitted for review, other states are experiencing longer processing times. For our clients who are submitting contracts to multiple states, we have found that the entire process can take several weeks between submission and approval being granted for these new Legacy IRA QCD funded gift annuity agreements.

In conclusion, when new regulations for charitable gift annuities are enacted, such as the SECURE Act 2.0, organizations should be able to depend on their charitable gift annuity administrator for assistance. In times like these, the administration services that Cornerstone Management provides becomes even more impactful because we are working with many clients and various state regulators. This insight gives us, as an organization’s third-party administrator, the ability to better guide and assist our clients through the process for different states. As with any new regulation, there is a learning curve as administrators, regulators, and organizations alike are navigating the changes in a way that ensures state compliance and best serves the donors as well as the nonprofit organizations. In spite of these challenges, we have been very pleased with the response from donors and are excited for the potential fundraising opportunities that these Legacy IRA QCD funded gift annuities will allow charitable organizations.

Interested in learning more about Legacy IRAs? Please contact us to see how we can help and our approach to investment consulting and planned gift administration services.

Andrea Preissler