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  • Steven Roy

Secure 2.0's Dubious QCD Planning Opportunity

Among the 100 or so provisions of the Omnibus Funding Bill that address Secure 2.0 Act pension and retirement plans are two provisions that affect Qualified Charitable Distributions (QCDs). One of those provisions is undoubtedly beneficial. The other is not quite as beneficial as it appears.

The Omnibus bill:

  • Indexes the current $100,000 QCD limit for inflation. The limit has not changed for fifteen years. Indexing will begin in 2024, based on 2023’s inflation rate. This is a clear-cut advantage for donors, and it requires little or no change to donor-advisor giving strategies.

  • Creates an "opportunity" for donors to claim up to a $50,000 QCD when they fund a Charitable Remainder UniTrust (CRUT), Charitable Remainder Annuity Trust (CRAT), or Charitable Gift Annuity (CGA). Because this provision is hedged by several restrictions, it is not quite the planning opportunity it might appear to be.

QCDs are traditionally treated as a charitable answer to the Required Minimum Distribution (RMD) regime. They permit the donor to satisfy their RMD obligation while excluding the IRA income from their gross income. The Omnibus bill retained the former QCD age limit, 70 ½ years of age, even as it raised the RMD age to 72, 73, or 75. This probably creates a planning opportunity – but I’m not clever enough to identify it.

Under pre-Omnibus rules, QCD’s could be made only to IRC 501(c)(3) exempt public organizations. Private foundations, supporting organizations, and donor-advised funds were ineligible, as were split-interest funds (A category that includes CRUTs, CRATs, and CGAs).

Charitable remainder trusts allow donors to make deductible asset contributions, while retaining the right to the income stream those assets generate. At the end of the trust’s lifetime or term, any trust assets that remain are distributed to one or more charitable remainder beneficiaries.

Giving donors the opportunity to fund their CRAT or CRUT using “free money” sounds attractive. But the Act imposes additional conditions that make it less so:

The $50,000 once-in-a-lifetime exclusion doesn’t justify the expense of creating and operating the trust vehicle. CRATs and CRUTs have approximately the same startup and operation costs as private foundations. Those costs reduce the value of the trust’s initial funding and act as a constant drag on subsequent portfolio performance. In turn, that reduces the trust’s benefit to both the donor and the eventual charitable beneficiary.

Startup and operations cost would not be a major deterrent if the donor could apply their exclusion to fund an existing split-interest trust. However, the Omnibus Act precludes this option as it incorporates the language of the Secure 2.0 Act *1 limiting the exclusion to trusts that are “funded exclusively by qualified charitable distributions.

Further reducing the attractiveness of QCD funding, the Secure 2.0 Act limits the trust’s income-beneficiaries to the Donor-IRA owner and their spouse. While the trust transactions generate preference income (e.g., long-term capital gain and qualified dividends), that income would be passed through to the donor-beneficiary as ordinary taxable income – negating most of the tax advantage of the arrangement.

Because of these limitations it is hard to imagine a situation in which a CRAT or CRUT would be a cost and tax effective vehicle for a QCD. Charitable Gift Annuities with lower out-of-pocket costs may, however, prove their usefulness – despite their own set of deficiencies. *2

*1 Section 307 of Secure Act 2.0. The Secure Act is integrated into the Omnibus bill in its entirety. *2 CGA income payouts must commence within one year of issuance and are subject to a 5% minimum distribution rule.

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