"Lifelong Income From a QCD?" by Julie Jason

Originally published: June 2, 2023 (distributed by Andrews McMeel Syndication)

Did you know that a qualified charitable distribution (QCD) can not only limit your tax liability for a required minimum distribution, but it also can provide a life income plan?

     QCDs, which came into existence as part of the Pension Protection Act of 2006, provide a way for IRA owners who are charitably inclined to use part or all of their required minimum distributions (RMDs) -- up to $100,000 per year -- to avoid being taxed on the RMD when donating to a qualified charity. You can see if a charity qualifies by using the IRS Tax Exempt Organization Search Tool (tinyurl.com/497um8xp). 

     Some guidelines: The QCD is considered a nontaxable IRA withdrawal. The IRA owner must be at least 70 1/2 years old, which is younger than RMD starting age (currently age 73). The QCD must be paid directly from an IRA to a qualified charity. For more details, see IRS Publication 590-B (tinyurl.com/yc6tx8dh).

     Now, thanks to SECURE Act 2.0, which became law in December 2022 as part of the 2023 Consolidated Appropriations Act, the charity receiving the QCD donation can pay you lifelong income. See "One-time Election for Qualified Charitable Distribution to Split-interest Entity," Section 307 of SECURE Act 2.0 (tinyurl.com/ycyck5bs). 

     A "split-interest entity" is defined in SECURE Act 2.0 as one of three things: a charitable remainder annuity trust, a charitable remainder unitrust or a charitable gift annuity. All three have the same requirement: they must be "funded exclusively by qualified charitable contributions." 

Let's do an example first, then we'll come back for details and restrictions. 

     Say you are a 74-year-old alum of Duke University. You make a $50,000 QCD to Duke's charitable gift annuity life income plan. Based on your age and the payout rate (6.4%), you will receive $3,200 a year (taxable) for as long as you live. The university keeps the remainder when you pass away. 

     Some details: $50,000 is the maximum you can transfer to a split-interest entity. You can only do one in a lifetime, and you cannot split it up over a number of years. That is, while you can transfer less than $50,000 to a split-interest entity, you can't decide to transfer $25,000 one year and $25,000 the next. Note that your spouse can also contribute up to $50,000 as a QCD from his or her IRA under the same rules.

     The $50,000 (or whatever amount you choose) counts toward your annual QCD limit for a given year (currently $100,000). There is no charitable deduction for the QCD. However, the dollar amount is not subject to income taxation. As mentioned previously, per IRS rules, the donation must be paid directly from the IRA to the qualified charity.

     The charity is required to start payments no later than one year after the date of funding. Those payments will be considered ordinary income for you and will be taxable at your tax rate. Only you or your spouse can receive payments from your plan -- your children cannot receive payments.

     The American Council on Gift Annuities, a nonprofit organization, provides suggested maximum gift annuity rate tables for both single life and two lives at its website (tinyurl.com/23w49r4p). "Most charities offer rates established by the American Council on Gift Annuities," according to the organization, which adds that the rates "are designed to balance an attractive payment stream for the annuitant with a good gift for the charity" (tinyurl.com/4h9wncjj).

     If you are thinking of doing this type of life income plan, you will want to consult your tax adviser to make sure you understand all the nuances of QCDs, as each individual's tax situation is unique. You also will want to discuss your wishes with the charity you are considering (note that some charities are not eligible to receive QCDs).

     This is a way to save tax dollars that would be paid on an RMD, while benefiting a charity and receiving some income at the same time. 

     It is a good deal for individuals who don't need their RMD cash for living expenses who are charitably inclined. But I wonder about the limitations. If legislators are reading this column, why not raise the current QCD limit above $100,000 plus inflation? Then match split-interest requirements to QCD dollar limits and permit annual contributions.