By Timothy J. Rice, Esq. Founder and Managing Partner, Timothy Rice Estate and Elder Law Firm; and a member of Samaritan’s Planned Giving Committee, a group of the region’s leading financial advisors, volunteering their time and expertise to raise awareness of the impact and advantages of charitable tax and estate planning.
Qualified Charitable Distributions (QCDs) have become an essential tool for individuals seeking to combine philanthropy with smart tax and estate planning strategies. A QCD is a direct transfer of funds from a person’s individual retirement account (IRA) to a qualified charity. Unlike regular charitable donations, QCDs allow individuals to donate to causes they care about while simultaneously reducing their taxable income. Since they were introduced as part of the Pension Protection Act of 2006, QCDs have become a popular tax planning tool.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), passed by Congress and signed into law by Pres. Donald Trump in 2019, was significantly revised in 2023. Previously, the limit on qualified charitable distributions was capped at $100,000. But under what became known as SECURE Act 2.0, the limit was indexed for annual inflation, allowing for increased contributions in future years. SECURE Act 2.0 also allows for a one-time qualified charitable distribution of up to $50,000 directly from an IRA into a charitable remainder trust.
How QCDs Benefit Estate Planning and Taxes
QCDs offer unique benefits that align financial goals with charitable giving. Some key benefits include:
- Reduce taxable income: QCDs are excluded from your taxable income, unlike regular withdrawals from traditional IRAs, which are taxed as ordinary income. This exclusion can help you avoid moving into a higher tax bracket and reduce the impact on income-based calculations, like Medicaid qualifications.
- Satisfy Required Minimum Distributions (RMDs): For individuals aged 73 or older (the new RMD age under SECURE Act 2.0), QCDs count toward satisfying RMD requirements. This is especially useful if you don’t need the income from your RMD and would prefer to direct those funds to a charitable cause instead of incurring additional taxable income. Fulfilling your RMD obligations through QCDs also avoids the steep penalty for failing to take an RMD, which was reduced to 25% (or 10% if corrected promptly) under SECURE Act 2.0.
- Support your legacy: Including QCDs in your estate planning strategy allows you to leave a philanthropic legacy while reducing the size of your taxable estate. This can help preserve more wealth for your heirs.
- Simplify estate planning: Directing IRA funds to charitable causes via QCDs can simplify the transfer of wealth, reducing the administrative burden on your estate and beneficiaries.
What You Need to Know About QCDs for Estate Planning
Work with Your Advisors
To maximize the benefits of QCDs and ensure compliance with the law, it’s essential to work closely with a team of trusted advisors. A financial advisor can help you determine the optimal amount to donate based on your income and tax situation, while a tax professional can confirm how the QCD will impact your overall tax liability. An estate planning attorney can ensure the QCD aligns with your broader estate planning strategy, including provisions for other assets, heirs and charitable goals. Together, this team can craft a cohesive plan tailored to your financial and philanthropic objectives.
Document Your Charitable Intentions
Including your QCD intentions in your estate plan ensures your wishes are clearly articulated and executed. This documentation is particularly important if you plan to use QCDs over several years or if your charitable giving is tied to specific causes or organizations. By clearly outlining your intentions, you reduce the likelihood of misunderstandings or disputes among heirs or beneficiaries and ensure that your legacy reflects your philanthropic values.
Consider the Timing
Timing is critical when making QCDs. Planning early in the tax year gives you ample time to coordinate with your IRA custodian and ensures the funds are distributed to the charity on time. Early planning also helps align your QCDs with RMD schedules, avoiding potential penalties for missed RMDs. Procrastinating could result in missed opportunities for tax savings or delays in processing the donation, which could jeopardize your ability to claim the QCD for that tax year.
Verify Eligible Charities
Not all charitable organizations qualify to receive QCDs, so it’s vital to confirm that your chosen charity meets IRS requirements. Eligible recipients must be 501(c)(3) organizations and cannot include donor-advised funds, supporting organizations or private foundations. Before initiating the transfer, verify the organization’s status using the IRS’s Tax-Exempt Organization Search tool. Failing to confirm eligibility could result in the QCD being disallowed, turning it into a taxable IRA withdrawal and negating its tax benefits.
Review Contribution Limits
While the annual QCD limit is currently $100,000 per individual, it’s important to consider this cap when planning donations, especially if you’re considering funding split-interest charitable entities like charitable remainder trusts or charitable gift annuities. If your charitable goals exceed the annual limit, you may need to coordinate multiple years of giving to achieve your objectives without exceeding the cap.
Communicate with Charities
Once you’ve selected an eligible charity, ensure open communication to confirm its ability to receive QCDs and its preferred method of receipt. Some charities have specific protocols for processing QCDs, and coordinating in advance can avoid administrative hiccups. Providing your name and contact details along with the QCD can also help the charity properly acknowledge your gift, which is important for record-keeping.
Looking Ahead
The SECURE Act 2.0 has made QCDs an even more attractive option for individuals nearing or in retirement who wish to incorporate charitable giving into their tax and estate planning. Whether you’re interested in reducing your tax burden, satisfying RMD requirements or leaving a philanthropic legacy, QCDs offer a powerful way to achieve your goals.
For those interested in exploring how QCDs can fit into your estate plan, consulting with knowledgeable professionals is the first step toward creating a strategy tailored to your unique needs and aspirations.
As founder and managing partner of Timothy Rice Estate and Elder Law Firm, Timothy J. Rice, Esq. has focused his law practice on estate and elder law matters since 1991. He can be reached at (833) 888-0462 and [email protected].