How retirement assets support charitable giving

By Richard C. Wilson

Begin by deciding what you want to review: a charitable payment now, a beneficiary designation for death, or payments to individuals followed by a charitable remainder. Bring that objective, the account records and the proposed recipient's information to your advisers.

Research notice: Based on primary sources linked below. Core authorities include IRC §§408, 664 and 2055 and the IRA distribution regulations. Check the indexed limits for the applicable tax year. Ask an estate attorney or CPA to confirm account eligibility, beneficiary documents, trust terms and tax treatment before acting.

How a lifetime qualified charitable distribution works

A qualified charitable distribution, or QCD, requires payment directly from an eligible IRA's trustee to an eligible charity after the person for whose benefit the account is maintained has attained age 70½. Only the otherwise taxable portion qualifies.

The charity must meet the statutory eligibility requirements, and other QCD requirements apply as described below. Ongoing SEP and SIMPLE IRAs are excluded.

A SEP or SIMPLE IRA is ongoing when an employer contribution is made for the plan year ending with or within the taxable year of the distribution. Ask the custodian to confirm that status before requesting a transfer.

The indexed annual exclusion limit is $111,000 under the notice linked in Sources. Verify the amount for the distribution's tax year, and apply the deductible contribution adjustment explained below.

An inherited IRA can use these same QCD provisions when its living beneficiary has attained age 70½ before the distribution. The beneficiary's age controls that test, and all the account, recipient, payment and exclusion requirements in this section still apply.

The entire distribution must otherwise qualify for a charitable deduction under IRC §170, disregarding its percentage limits. Substantiation requirements remain, including the same type of acknowledgment otherwise needed to claim a charitable deduction.

A QCD excluded from gross income receives no additional charitable income tax deduction. Keep the charity's acknowledgment with the custodian's transfer records so the tax preparer can review both the payment and its treatment.

Deductible IRA contributions allowed under IRC §219 for taxable years ending on or after attaining age 70½ cumulatively reduce the available QCD exclusion. Subtract amounts already used to reduce an earlier year's exclusion, and do not reduce the current exclusion below zero.

Give the preparer your contribution deduction history and prior QCD adjustments. Reviewing only the proposed charitable transfer leaves out information needed for that cumulative adjustment.

Required minimum distributions from inherited and traditional IRAs

A payment meeting all the QCD requirements above counts toward the IRA's required minimum distribution, or RMD, even though excluded from income. Counting toward an RMD does not by itself establish QCD eligibility.

IRA RMDs generally are calculated separately, but permitted aggregation allows the total to be distributed from one or more eligible IRAs. Owned IRAs aggregate separately from inherited IRAs.

Inherited IRAs from the same decedent may aggregate with one another. They may not aggregate with owned IRAs or inherited IRAs from a different decedent.

A surviving spouse who elects to treat an inherited IRA as their own falls within the ownership exception. Use the surviving spouse guide for a separate review of that election.

Distributions from non Roth IRAs, Roth IRAs and IRC §403(b) contracts cannot satisfy one another's RMDs. Aggregating an IRA annuity contract with account balance IRAs requires a separate election.

Prepare an account list grouped by ownership and, for inherited accounts, by decedent. Ask the preparer which accounts may be combined for distribution purposes and which proposed charitable payments satisfy the QCD requirements.

How a charitable remainder trust receives retirement assets

For a charitable remainder trust proposed as a retirement account beneficiary, review the beneficiary designation alongside the trust instrument. The trust's payment terms and the account's distribution requirements need separate attention.

A charitable remainder annuity trust, or CRAT, pays a sum certain based on the initial net fair market value of property placed in trust. A standard charitable remainder unitrust, or CRUT, pays a fixed percentage of net fair market value determined annually.

For either qualifying structure under IRC §664, the payout rate must be at least 5% and no more than 50%, with payments at least annually. Payments run for qualifying lives or a term no longer than 20 years.

Any individual payment recipient must be living when the trust is created. At least one payment recipient must be outside the charitable organizations described in IRC §170(c).

The charitable remainder value, determined under IRC §7520, must be at least 10% of the initial property value for a CRAT. For a CRUT, that test applies to each contribution's value when contributed.

After the payment term, the remainder must pass to, or be retained for the use of, a qualifying charity. No other private payments are permitted, apart from the statute's separate exception for qualified gratuitous transfers.

An income limited CRUT may pay trust income when income is below the standard payment amount. If its terms provide, later excess income may make up earlier shortfalls.

A CRAT or CRUT meeting these qualification requirements generally pays no federal income tax at the trust level. Unrelated business taxable income triggers an excise tax equal to that income, and beneficiary payments retain their separate tax rules described below.

Ask counsel to review the proposed payout, payment term, remainder valuation and permitted payments together. A familiar trust label alone is not enough for that review.

Charitable beneficiary choices and estate tax treatment

Separate the planning discussion into direct charitable payments, an outright charitable beneficiary designation and a charitable remainder arrangement. Use the QCD requirements above for a proposed IRA transfer and the trust requirements above for a proposed CRT.

Naming charity outright

Naming a charity outright provides a separate path from a QCD or CRT, subject to the beneficiary designation, plan terms and spousal protections explained here. Confirm that the organization's tax exemption applies under IRC §501(a).

IRA distributions ordinarily enter the recipient's income under IRC §408(d)(1), subject to applicable exclusions. An organization's exemption may be denied under IRC §§502 or 503, and taxes under parts II, III and VI of subchapter F remain possible.

Review the organization's status and the particular distribution rather than assuming every charitable recipient or retirement payment is free of tax. The IRS organization search in Resources is a starting point for that review.

A retirement account generally passes to the person named on its beneficiary form, subject to spousal rights and the plan's rules. Inheriting under a will or state law does not make someone a beneficiary designated under the plan without that designation.

ERISA fiduciaries must follow plan documents insofar as those documents comply with ERISA. ERISA pension benefits generally cannot be assigned or alienated, with a qualified domestic relations order providing the relevant statutory exception.

Employer plans subject to the survivor annuity rules must provide the required joint and survivor annuity for a vested participant. If the participant dies before the annuity starting date leaving a surviving spouse, the required preretirement survivor annuity must be provided.

Waiver requires the spouse's written consent, witnessed by a plan representative or notary.

Those rules cover defined benefit plans, money purchase plans subject to funding standards and other defined contribution plans unless the statutory exception applies. IRAs are not covered by IRC §401(a)(11).

For other defined contribution plans, the exception requires the full vested balance to be payable at death to the surviving spouse, or another beneficiary if there is no surviving spouse or the spouse gives the required consent. No life annuity may have been elected.

Before naming charity on an employer plan, request the plan's beneficiary and spousal consent procedures. Take any existing consent or domestic relations order to that review.

The lifetime QCD election for a trust or annuity

Check the election timing, direct payment requirement and indexed limit before applying the arrangement requirements below. Apply the QCD requirements and exclusion adjustment already explained.

The election permits a qualifying CRAT, CRUT or charitable gift annuity funded exclusively with QCDs. Only the account beneficiary, their spouse or both may hold income interests, and those interests must be nonassignable.

For a CRT, the entire charitable remainder must otherwise be deductible under IRC §170. For a gift annuity, the distribution reduced by the annuity's value must otherwise be deductible. Percentage deduction limits are disregarded for these tests.

A gift annuity must commence fixed payments of at least 5% within one year of funding. A CRAT or CRUT must meet all the trust qualification requirements in the preceding section.

Under this special election, CRT payments to beneficiaries are ordinary income, overriding the ordinary CRT payment tiers below. QCD funding of the gift annuity creates no investment in the contract under IRC §72(c).

Apply those special tax provisions to the elected arrangements. They are not a general description of every CRT funded at death.

The estate tax charitable deduction

For a U.S. citizen or resident decedent, a federal estate tax charitable deduction requires property included in the gross estate and transferred to an eligible recipient under IRC §2055(a). The charitable beneficial interest must be ascertainable and severable.

For a shared private and charitable remainder arrangement covered by IRC §2055(e)(2), the remainder must be in a qualifying CRAT, CRUT or pooled income fund. The statutory exception for an interest described in IRC §170(f)(3)(B) applies.

Transfers to organizations or trusts described in IRC §§508(d) or 4948(c)(4) face disallowance under those provisions' conditions. The deduction cannot exceed the transferred property's value included in the gross estate.

Estate, succession, legacy or inheritance taxes payable from the charitable gift reduce the deduction. A private income interest followed by a charitable remainder does not make the entire retirement account deductible.

Ask the estate's advisers to review the charitable interest, included property value and allocation of death taxes together. Keep that estate tax analysis separate from beneficiary payment reporting.

How trust payments are taxed to the individual beneficiary

Outside the special lifetime QCD election just described, CRT distributions follow ordered tax tiers. Each income tier includes current income and accumulated undistributed income of that character.

1. Ordinary income comes first, to the extent of available ordinary income.
2. Capital gains come second, to the extent of available capital gains.
3. Other income comes third, to the extent of available other income.
4. Trust corpus comes fourth.

Income in respect of a decedent retains the character it would have had in the decedent's hands. The trust's records therefore matter when identifying the character carried out to a beneficiary.

Ask the trust's tax preparer to explain the available tiers and the reporting for each payment. Avoid treating the trust's general income tax exemption as an exemption for its individual beneficiaries.

Questions to ask counsel about a charitable remainder trust

Use the payment and qualification requirements above to frame a discussion of the proposed arrangement. Ask counsel to walk through the intended recipients, the payment term and the charitable remainder before documents are signed.

• Which people are intended to receive payments, and which charity is intended to receive the remainder?
• How do the proposed annuity or unitrust terms fit the qualification requirements?
• What happens under the proposed instrument if an intended recipient dies?
• Which account distribution questions need review separately from the trust's payment terms?
• Who will maintain the trust's income records and prepare beneficiary reporting?

Request an explanation tied to the proposed instrument and account documents. Use the trust beneficiary guide for detailed trust qualification and payout classification questions.

Common questions