The Legal Roadmap for IRA Distributions to CRTs and for Charitable Gift Annuities

Abstract

The “SECURE 2.0" legislation of 2022 permits individuals over the age of 70 ½ to make a once-in-a-lifetime tax-free transfer of up to $50,000 directly from an Individual Retirement Accounts (“IRA”) to a charity for a charitable gift annuity (“CGA”) or to a charitable remainder trust (“CRT”). The distribution will be excluded from the IRA owner’s taxable income as a qualified charitable distribution (“QCD”). For individuals age 73 or older, the QCD counts toward satisfying the required minimum IRA distribution for that year.

This article examines every legal requirement that must be met in order for the IRA distribution to be excluded from the IRA owner’s taxable income. Problems can arise in situations when an IRA holds non-deductible contributions, or if the IRA owner claimed an income tax deduction for a contribution to an IRA after age 70 ½. Charities should not use standard off-the-shelf gift annuity agreements, but should instead have agreements drafted specifically for such IRA gifts. A standard CGA or CRT agreement might contain provisions that could make the IRA distribution taxable, such as permitting an assignment of the income interest or including beneficiaries other than the IRA owner and the spouse.

Even when all of the documents are properly drafted, there can be administrative problems that will cause the transaction to blow up. Even though the IRA owner will not be claiming an itemized charitable income tax deduction, all of the requirements to claim such a charitable deduction must be met in order for the IRA distribution to qualify as a QCD. For example, the IRA owner must receive from the charity an accurate contemporaneous written acknowledgment before filing a federal income tax return. The article also examines other unresolved legal issues, such as whether or not the distributions that the IRA owner receives from the CRT or CGA will be exempt from the Section 1411 3.8% net-investment income tax.

Keywords: IRA, charitable remainder trust, charitable gift annuity, individual retirement account, qualified distribution, SECURE 2.0

JEL Classification: J26, K34, L31