03.26.20

More opportunities for charitable giving: SECURE ACT

Contributed by Jane C. Paddison, Attorney-at-Law, Hutchinson Black & Cook, LLC and member of the Community Foundation's Board of Trustees

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law with an effective date of January 1, 2020. The retirement legislation includes policy changes that will impact retirement plans and participants in those plans in many ways. Although some of the changes are helpful for income tax planning, many are not and may result in a larger income tax burden to a participant and his/her family. To lessen the income tax burden, there are charitable giving alternatives that may help.

 
No More Stretch 
The SECURE Act will eliminate, for many families, the ability to "stretch" the income taxation of a retirement account over the life expectancy of a beneficiary. The ability to "stretch" income tax recognition is still available to the participant and certain categories of beneficiaries, including a surviving spouse, and with limitations, a minor child. The participant and his/her spouse will still be able to stretch the recognition of income from a retirement account over his/her life expectancy as was the case before the SECURE Act. For a minor child, the child's life expectancy may be used to stretch the retirement account income but only until the child attains the age of majority, at which point the remaining account balance must be reported as taxable income over a ten-year period. For most other beneficiaries who inherit a retirement account, the account balance must be reported as taxable income over a ten-year period. When the beneficiary reports the amounts over the ten-year period, such amounts will be subject to both federal and state income taxation (maximum federal income tax bracket of 37%; and Colorado's flat rate of 4.63%).
 
Charitable Giving Opportunity
A gift at death of a portion or all of a retirement account to charity will avoid the income taxation of the account altogether. This would be accomplished by designating a charity or a donor advised fund as the contingent beneficiary of the retirement account if there is no surviving spouse. The charitable gift would also qualify for the charitable deduction for federal estate taxation, for individuals who have a large estate.
 
You may also gain the benefit of a "stretch" by providing for a charitable remainder trust under your Will. The CRT would be designated as the contingent beneficiary (after the surviving spouse) of the retirement account, and the non-spouse beneficiary would be the beneficiary of the CRT. The CRT would be established for a term of years (not to exceed 20) or for the life of the beneficiary. No income tax would be incurred when the CRT receives the proceeds from the retirement account, and the individual beneficiary would only report income as he/she receives a distribution from the CRT. At the end of the term, a charity is designated to receive the balance.
 
Qualified Charitable Distributions (QCDs)
Individuals will continue to have the ability to make a direct gift to a charity from their IRA up to $100K if he/she is at least 70- 1⁄2. The QCD counts towards the required minimum distribution amount for the year of the gift. Under the SECURE Act, there are two changes in the calculation of required minimum distributions - first, distributions are not required until the participant attains the age of 72 for those individuals who were not yet required to take distributions before the passage of the Act, and second, as long as a participant is working, he/she may continue to contribute to his/her IRA. If the participant continues to make contributions to his/her IRA after age 70-1⁄2, then the amount of the QCD for that particular year must be reduced by the amount of such contribution.