Planned giving professionals often spend time with the wealthiest of donors, those for whom the tax aspects of their giving is frequently a significant driver. For these conversations, the technical details and legal aspects of charitable gift vehicles, such as charitable remainder trusts, can be an essential element in the pursuit of an optimum gift.

However, it is important to consider what drives the majority of donors who make up the lion’s share of planned gifts. Charitable bequests continue to be a huge source of giving, even though they don’t afford tax benefits for most donors. According to Giving USA, testamentary gifts hover between 8% and 10% of total giving each year. Our clients regularly receive more than 90% of their planned giving revenue through charitable bequests, beneficiary designations, and other revocable forms. These ratios have not changed much in the past 40 years despite changes in various tax laws.

The democratization of charitable gift planning – ensuring the tools of charitable gift planning are accessible to all, not just a few – can take many forms, some familiar and some newer. Understanding and appreciating these concepts and trends is critical for today’s planned giving officer.

A qualified charitable distribution (QCD) counts toward the donor’s required minimum distribution (RMD), and that’s a great way to avoid some of the income tax on the RMD. However, some donors miss the fact that RMDs apply to all qualified retirement plans. In addition, donors may not fully understand that withdrawals from any qualified plan are taxable income unless the withdrawal is a QCD or a tax-free rollover to a different qualified plan.

So, while it’s accurate to say “your QCD will reduce the tax on your RMD,” that’s true only for the IRA account from which the QCD is made. And that’s the trap that snared your hapless donor: there is an RMD on their 401(k) which they will have to take this year. But they cannot make a QCD from a 401(k) to offset that RMD. Even worse, their retirement plan custodian cannot make a tax-free rollover to an IRA until after this year’s RMD has been withdrawn from the 401(k). Alas, it’s too late for this year but, fortunately, it’s easy to avoid this trap next year … if they act now.

This checklist may be a helpful guide to moving their money from a 401(k), 403(b), or other non-IRA account to prepare for future QCD contributions.

You may also wish to read the associated featured article: The QCD/RMD Trap Door: Act Now Before It’s Too Late!

This visual is designed to show donors why waiting until the year they have an RMD to move their 401(k) results in an unnecessary tax bill.

You may also wish to read the associated featured article: The QCD/RMD Trap Door: Act Now Before It’s Too Late!

Here we are some 20 months after the passage of the Legacy IRA Act, and questions remain. That law updated Section 408(d)(8) of the Internal Revenue Code to allow Qualified Charitable Distributions (QCD) from IRAs to fund charitable gift annuities and charitable remainder trusts. After all this time, there remains some ambiguity.

A donor who inherits an IRA also inherits the ability to use the IRA to make qualified charitable distributions (QCDs), along with the limitations of this gift type.

To make a QCD contribution to charity, the beneficiary of the inherited IRA must be at least age 70 ½ at the time of the QCD. The age of the IRA’s original owner is not relevant, nor is the inheritor’s age at the time of the decedent’s death. The age that matters is that of the donor at the time they make the gift.

Collecting the funds, when a donor makes a charity the beneficiary of an IRA, can be challenging. There has been much discussion about IRA administrators who, with a few exceptions, require charitable beneficiaries to establish an IRA account to receive a distribution from the donor’s IRA, 401(k), 403(b), or other qualified plan.