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Charitable Present Annuities (CGAs) have lengthy been a well-liked manner for people with charitable intentions to plan their legacies. By contributing a lump sum to a charity in alternate for mounted recurring funds for all times (with any leftover funds after the donor’s dying going to the charity), the person can be certain that their funds are directed in the direction of a goal that aligns with their values, whereas additionally retaining a gentle supply of earnings for the remainder of their life. Nevertheless, the caveat with present CGAs has been that they might solely be funded with after-tax {dollars} earlier than the donor’s dying, that means that if a person solely had tax-deferred funds (e.g., in an IRA or 401(okay) plan) to contribute to the Charitable Present Annuity, they would want to withdraw – and be taxed on – these funds first. Testamentary CGAs, alternatively, could be established after a donor’s dying, funded with IRA or different property to offer earnings for an additional particular person. However the SECURE 2.0 Act, handed in December 2022, created the flexibility for people over age 70 1/2 to make a one-time Certified Charitable Distribution (QCD) of as much as $50,000 of IRA funds right into a CGA, with the quantity distributed to the CGA being excludable from the donor’s taxable earnings.
On this visitor put up, Kathleen Rehl, a semi-retired monetary advisor and educator now specializing in her personal property planning concerns, shares her expertise with creating her “Legacy IRA” rollover to a Charitable Present Annuity to help her chosen nonprofits after Congress handed the SECURE 2.0 laws on the finish of 2022.
The potential advantages of the brand new Legacy IRA guidelines are threefold. First, they permit donors to reinforce their charitable giving legacy and guarantee their future charitable intentions are fulfilled. Second, they scale back the donor’s tax invoice within the yr the CGA is created by excluding the quantity contributed to the CGA from taxable earnings. And third, they create a steady lifetime earnings stream that may be paid to the donor and/or their partner.
All of which is necessary throughout a time when members of the Child Boomer era, who’ve collected unprecedented ranges of wealth in comparison with earlier generations, are making ready to make selections on the best way to steadiness their intentions for transferring that wealth – whether or not that be passing it on to the following era of members of the family or associates, or offering for causes which might be significant to them – with their very own wants for sustainable retirement earnings. And whereas a Legacy IRA could solely be one piece of the puzzle (for the reason that $50,000-per-person lifetime restrict could solely characterize a small portion of the property of many high-net-worth households), it could nonetheless function a novel and beneficial legacy and tax planning software – and given the minimal expense and problem of organising and sustaining the CGA (for the reason that charitable group sometimes handles the entire administrative features of doing so), there could also be no purpose for any particular person with charitable intentions and lifelong earnings wants to not use it to the extent that the one-time $50,000 restrict permits!
Finally, for monetary advisors, the Legacy IRA could be one a part of a broader toolkit for serving to retired shoppers with values-based, purposeful legacy planning. By understanding the eligibility necessities and guidelines across the new regulation and present annuities generally, and having a ‘recipe’ that shoppers can comply with for establishing their very own Legacy IRAs, advisors may help plant the seeds with their shoppers round strategic giving (whereas additionally differentiating themselves to potential new shoppers as a go-to useful resource for property planning and charitable giving)!
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