How do the SECURE Act and the CARES Act affect your charitable giving?
By Bill Zook and Allison Parker
Two new laws have passed over that last year that have an impact on charitable giving. Last year’s SECURE Act focuses on changes to retirement accounts and this year’s CARES ACT is the $2 trillion economic stimulus bill created in response to the economic fallout of the coronavirus pandemic. While these two laws mostly function independently, they occasionally operate in tandem and indirectly increase or decrease the appeal of certain existing charitable giving techniques. Below we’ve highlighted three key elements of the new laws.
1. The “stretch IRA” is effectively dead, but the Charitable Remainder Trust (CRT) lives on!
As of Jan. 1, 2020, distributions made from an IRA upon death have become considerably more limited in their timeframes. Whereas they previously could be spread over as long as several decades, they must now be made in no more than 10 years. Exceptions exist only in the case of a surviving spouse or, under certain circumstances, a handful of other beneficiaries, mostly family members. But if IRA assets are distributed to a CRT—whether created during life or upon death—once a donor has died, one or more survivors can receive regular payments annually for many years, in some cases for life. When the trust ends, its assets are distributed to one or more charities, a feature that qualifies the trust for an estate tax deduction.
2. For this year only, qualified charitable distributions (QCDs) have become less attractive.
A QCD can still be made by anyone age 70.5 or older, but because required minimum distributions have been suspended for 2020, donors do not have an incentive to give unneeded IRA funds. This has not stopped numerous donors from giving their QCD to Seattle Foundation’s COVID-19 Response Fund, though, as many are realizing the need in our community is greater than ever.
In any year, of course, a donor age 59.5 or older can transfer long-term appreciated securities directly to a charity—including Seattle Foundation as the sponsor of a donor advised fund—and then withdraw taxable surplus funds equal to that of the securities from an IRA or a qualified plan. The gift results in a deduction equal to the cash withdrawn and avoids capital gains tax. The cash can be used to reestablish the position in the securities contributed, this time with a higher cost basis.
3. Outright gifts of cash to public charities made in 2020 only have become somewhat more attractive.
The CARES Act allows people who itemize deductions to claim deductions for gifts of cash up to 100% of adjusted gross income (AGI) rather than just 60% of AGI—although donor advised funds, supporting organizations, and private foundations are excluded from this provision. Gifts of appreciated securities are the most common way philanthropists add to their donor advised funds, but sometimes a donor wishes to contribute cash.
For example, earlier this month a donor’s home sold and they had planned to give a portion of the proceeds to their Seattle Foundation donor advised fund. Thankfully their financial advisor understood the CARES Act provision. Instead of giving the cash to their DAF, the donor worked with their philanthropic advisor to review their giving plan, and then gave directly to nonprofit organizations they wished to support in lump sums.
As before the CARES Act, a limit of 50% of AGI still appears to apply when a taxpayer’s deductions derive from gifts of assets and cash. Likewise, complications can arise when charitable deductions are carried forward from prior years or when gifts are made in certain ways, as in the exclusion described above. Moreover, the marginal tax savings associated with charitable gifts of cash decline to zero as one gets closer to the 100%-of-AGI ceiling. Accordingly, donors should exercise caution and consider their options. For taxpayers who do not itemize, including those planning to “bunch” their deductions in a year after 2020, a dollar-for-dollar adjustment to income (i.e., not a deduction) of up to $300 is available when cash is contributed.
Whether you’re considering new developments or tried-and-true charitable techniques, you can always turn to Seattle Foundation for ideas about how to help your clients fulfill their philanthropic goals. To learn more, contact Bill Zook or Allison Parker.
By Bill Zook is senior advisor, gift planning, and Allison Parker is managing director, philanthropy strategies