Using IRAs and Trusts in Charitable Giving
David DelFiandra, Partner, Leech Tishman
The end of a tax year is a great time to reflect on finances and charitable intent. This year has brought with it many challenges due to COVID-19 and its impact in almost all areas of our lives. That, combined with the fact that this is an election year, should cause all of us to pay particular attention to certain charitable opportunities that have been impacted by legislation and the current interest rate environment.
The CARES act was passed by Congress to provide financial relief to Americans impacted by COVID-19. A provision of the CARES Act makes changes to charitable deductions on income tax returns for calendar year 2020 only.
First, every taxpayer can take a $300 above the line deduction for charitable contributions. You do not need to itemize to take this deduction.
Second, if you choose to itemize, you are able to deduct 100% of cash gifts in 2020 without any Adjusted Gross Income (AGI) limitations.
The Secure Act was passed in late 2019 and became effective on January 1, 2020. This law was not COVID-19 related, but it impacts every taxpayer with a qualified plan (IRA, 401k, 403b). The first change is that the date on which you must begin taking a Required Distribution has increased from age 70 ½ to age 72. The second change is that most non-spouse beneficiaries can no longer stretch the Required Distributions over the beneficiary’s remaining life expectancy. Instead, they are now allowed a maximum deferral of 10 years. This is a big tax blow to the beneficiaries because it generates more taxable income and less time to grow tax free.
The Secure Act did not change your ability to direct up to $100,000 per year to a charity from a qualified plan. Any such amounts will be deemed a qualified charitable distribution and count toward any Required Distribution. In addition, you are allowed to implement this annually so long as you are age 70 ½.
In addition to giving outright to a charity or creating a Donor Advised Fund to further control your giving, now presents a good time to consider establishing a Charitable Trust. A Charitable Trust is drafted by a lawyer and can take the form of a Charitable Remainder Trust or Charitable Lead Trust.
Charitable Remainder Trusts
With a remainder trust created during your lifetime, you contribute assets (usually appreciated securities) to the Charitable Remainder Trust and you (or another non-charitable beneficiary) retains an annuity of at least 5% of the initial fair market value. The annuity can be paid for a term of up to 20 years or life. You obtain a charitable deduction equal to the present value of the projected remainder passing to the charity. The charity can be changed during the term of the trust and you can serve as the Trustee if created during your lifetime.
Since the passage of the Secure Act and the elimination of the stretch for the beneficiaries, individuals may consider creating a testamentary Charitable Remainder Trust. A testamentary charitable remainder trust is established in your Last Will and Testament. Instead of naming your children as the beneficiary of your qualified plans, you may designate the Charitable Remainder Trust as the beneficiary. You would name your children as the beneficiary of the Charitable Remainder Trust for the remainder of their lifetimes. This essentially replaces the stretch that was eliminated by the Secure Act. It allows your children to stretch the ordinary income over their remaining lifetimes rather than the 10 years required by the Secure Act. A charity you designate, such as the Washington County Community Foundation, receives the remainder of the trust assets at the death of your children.
Charitable Lead Trusts
A Charitable Lead Trust is the opposite of a Charitable Remainder Trust. It provides that the charity gets an upfront income interest and a non-charitable beneficiary obtains a remainder interest. Charitable Lead Trusts are great vehicles to implement in this historically low interest rate environment since the gift of the remainder will be based on a very low Internal Revenue Code Section 7520 interest rate.
Overall, this last quarter of 2020 provides unique opportunities to obtain tax advantages and provide for the Washington County Community Foundation:
David J. Delfiandra is a Partner and Chair of Estates & Trusts Practice Group with Leech Tishman. He works closely with individuals and businesses on sophisticated estate planning and administration issues impacting wealth preservation. This includes the preparation of sophisticated estate plans designed to control and preserve wealth from one generation to another, and asset protection trusts offering maximum protection from future creditors.
He focuses his practice on the preparation of simple and complex wills, living wills and powers of attorney, estate, trust and guardianship planning and administration, planning for individuals with special needs, pre-marital agreements, and the development of lifetime gifting programs and estate litigation.
David is licensed to practice law in Pennsylvania, Florida, and West Virginia.
David is a member of Leech Tishman's Management Committee.