By: Kara Morin, Senior Director of Planned Giving Services; Jeff Lydenberg, Vice President Consulting; Craig Wruck, Senior Advisor, and Jay Pacitti, Client Services Advisor. Updated 7/26/24.
What is the “Legacy IRA”?
The “Legacy IRA Act ” allows donors, under certain circumstances, to make a one-time tax-free Qualified Charitable Distribution (QCD) from their IRA in exchange for a life income gift. This is a once in a lifetime election, subject to the limitations explained below.
How does it work?
The Legacy IRA plan allows a tax-free QCD from an IRA account to establish a charitable gift annuity or charitable remainder trust. For reasons detailed below, a QCD to CRT is often impractical and unlikely to be attractive to many donors; the QCD in exchange for a CGA is a more attractive gift vehicle.
How often can a donor make a Legacy IRA QCD contribution?
A donor can take advantage of this opportunity in only one tax year during their lifetime.
How much can a donor contribute?
In 2024, a donor can contribute up to $53,000, across one or more gifts, at one or more charities, all of it in one tax year. The total amount distributed counts toward the annual $105,000 limit for QCDs. (Note that the $53,000 and $105,000 limits are adjusted for inflation each year.)
If the donor doesn’t use the full $50,000 in a single calendar year, does it rollover?If the donor doesn’t use the full $53,000 in a single calendar year, does it rollover?
No. They have one year in which to use this opportunity, there is no rollover or carry forward.
How does a Legacy IRA QCD contribution work with the existing QCD law?
As with QCD outright gifts, a Legacy IRA QCD contribution for a life income gift counts toward a donor’s required minimum distribution (RMD). In 2024, the total limit for QCD contributions is $105,000 per year, but within this limit there is an aggregate limit of $53,000 for Legacy IRA QCD gifts. (The $105,000 and $53,000 limits are adjusted for inflation each year.) For example, in 2024 a donor could make a Legacy IRA QCD of $53,000 and make additional outright QCD contributions totaling $52,000.
Is there an age limit?
A donor must be at least age 70½ at the time the donor makes a QCD contribution of any kind. If a donor includes a non-donor spouse under 70½, the gift will still qualify so long as the payout amount is at least 5%.
Does a Legacy IRA QCD contribution to a life income plan satisfy the donor’s RMD?
Yes. Just like an outright QCD contribution, a QCD to fund a life income plan counts toward the donor's RMD dollar for dollar. There is more information about RMDs below.
Can a donor name others to receive payments from a Legacy IRA QCD contribution?
A donor can name him or herself and/or a spouse to receive payments.
How are payments from a life income gift funded via a Legacy IRA QCD contributions taxed?
All payments from either a CGA or a CRT funded via a Legacy IRA QCD contribution are taxed as ordinary income. There is no tax-free or capital gains income as there could be if the life income gift were funded with cash or other assets.
Does the donor get a charitable deduction for a Legacy IRA QCD contribution?
There is no charitable deduction, however, there is no income tax on the QCD either.
What is the minimum payout?
The minimum payout is 5% for both CGAs and CRTs funded via a Legacy IRA QCD contribution. Often, the rate a charity will offer for a CGA depends upon the age of the annuitant(s) at the time of the gift. Although the ACGA rates for a single life age 70½ (age 71) or two lives, both age 70½ (age 71) exceed 5%, use caution if a non-donor annuitant spouse is under 70½ to ensure meeting the 5% minimum.
Can a donor fund a deferred/flexible deferred or college annuity with a QCD?
No, but the Legacy IRA Act does allow for a CGA with annual payments beginning one year from the date of the distribution.
What about funding a charitable remainder trust with a QCD?
The Legacy IRA Act permits funding a CRT with a QCD, however, as a practical matter this option is very limited. In most circumstances, funding a CRT with only $53,000 does not make economic or practical sense. Even if each member of a married couple is eligible to contribute a QCD of $53,000 to jointly fund a CRT, the resulting total is probably still too low to be practical. For these reasons, the Legacy IRA QCD will primarily be used with charitable gift annuities.
Can a donor make an additional contribution to the CRT to bring it up to our required CRT minimum gift?
No. A donor cannot contribute any other asset to a Legacy IRA Act CRT except for the initial QCD.
Can a donor contribute an additional asset to fund the CGA?
No, additional assets cannot be combined. Any asset contributed on the same day to the charity for a CGA would have to be used to establish a second CGA on the same date.
How does a donor make a Legacy IRA QCD contribution in exchange for a CGA?
To qualify, the QCD must go directly from the IRA custodian to charity, it cannot first be distributed to the plan’s owner (the donor). To ensure that the transfer happens properly, the donor needs the charity’s legal name, their tax ID number (EIN), and their legal address. This information, along with the QCD amount, is then given to the custodian, typically through an online form. The custodian will then issue a check directly to the charity. Some plan owners have check writing ability against their IRA accounts. In such cases, a donor could write a check directly to the charity to establish the gift. However, caution should be exercised at year end to ensure that the IRA check is deposited by the charity prior to the end of the tax year.
How does a donor make a Legacy IRA QCD contribution to a CRT?
The trust must be drafted and signed prior to the donor requesting the QCD funding amount. Once the trust has been established, the donor follows the steps above to request a QCD distribution from their IRA custodian to the trustee of the CRT.
How do I determine the gift date?
The legal date of gift for all QCDs, whether outright or used to establish a life income gift, is the date they leave the donor’s account. For checks received directly from the IRA custodian, charities can use the date the check is issued. For checks received from donors written against their IRA accounts, best practice is to ensure the check is deposited before the end of the tax year.
Can the annuitant assign their income interest in favor of the charity?
No. For a Legacy IRA the income interest in the CGA or CRT is non-assignable. You may need to amend your annuity agreements for CGAs if they say the annuity is assignable to the issuing charity, which is quite typical. If your charity is registered in states that require submission of sample CGA contracts, you will need to submit additional sample contracts for CGAs funded with QCDs (likely with the assignability section considered a variable and not fixed text).
How do the ages for a QCD and the RMD interact?
A donor can make a QCD contribution beginning at age 70½. The age at which RMDs are mandatory is 73. A donor can make a QCD beginning at 70½ and prior to being subject to RMD, but the additional tax benefit of satisfying the RMD with the QCD does not begin until the donor is subject to RMD.
What is the Required Minimum Distribution?
Qualified retirement plans, such as 401(k)s and IRAs, are funded with pre-tax income and grow tax-free.Then, when the taxpayer withdraws money from those accounts, the withdrawal is taxed as ordinary income. Withdrawals are not required until the plan owner reaches an age subject to the Required Minimum Distribution (RMD), after which the individual must withdraw – and pay income tax on – a certain required minimum amount each year. Currently, the age at which RMDs are mandatory is 73. Failure to take the full RMD is subject to a penalty of 25% of the amount not withdrawn. If the individual doesn’t want or need their RMD, a QCD is a good way to avoid taxation on the RMD, as well as the penalty for failure to make the full RMD withdrawal.
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Comments
RE: QCD from IRA for CGA - additional questions
PGM Anywhere will automatically calculate the actuarial age, no effort is needed on your part. All of the charts, diagrams, and narratives (including the CGA Disclosure Agreement) have been updated, so the message that appeared with the work-around regarding capital gain no longer appears. The QCD IRA CGA can be structured as an annual, monthly, quarterly, or semi-annual payment. In the presentation we discussed that language in the legislation that some hoped allowed a one-year deferred gift annuity was actually there to make an annual payment CGA possible. --Kara Morin, PG Calc
Doing my first of these QCD from an IRA for a CGA now - and have some additional questions for PG CALC:
If donor is 72 now but turns 73 later this year, should I send illustration with a gift date for when he turns 73 - or is actuarial birthday the right way to go?
Used the "hack" instructions for my first QCD CGA illustration. Gift chart still says that one of the benefits is "reduced tax on capital gains" is that true?
In the presentation from PG CALC it was stated that QCD IRA is designed for annuitant to receive one payment a year. Can we break out quarterly?
We have a standard Disclosure Statement that may say certain things (non assignable except for charity, deduction). How should we revise for QCD?