Charitable gift annuity Charitable IRA rollover Charitable remainder unitrust SECURE Act

Giving to Duke

Blueprints Blog

Is your retirement and wealth plan more secure with the SECURE Act?

Key changes to retirement account rules and how charitable planning can help.

January 24, 2020 | by Jeremy Arkin, Phillip Buchanan


Is your retirement and wealth plan more secure with the SECURE Act?

In December 2019, President Trump signed into law several changes to the rules regarding retirement accounts such as 401(k)s and IRAs. Congress named the legislation the “SECURE Act,” which stands for the “Setting Every Community Up for Retirement Enhancement Act.”

Some taxpayers may feel a bit more secure with these changes in place, or at least a bit relieved. One popular provision of the Act raises the age at which account holders are required to take taxable distributions (called “required minimum distributions”, or “RMDs”), from 70 ½ to 72.  

The demise of the “stretch” IRA and a potential solution

But other changes will be less popular. Most notably, the “stretch” IRA is now out of reach for many families.

Prior to the SECURE Act, an individual who inherited an IRA from a parent was probably required to start taking withdrawals in the year of that parent’s death. Such payments were usually taxable to the heir at ordinary income tax rates. But, in most cases, the heir could “stretch” the payments out over her life expectancy, thereby spreading payments over many years and allowing assets in the account to continue to grow, tax-free, for a long period of time. The ability to provide an heir with a lifetime income through a stretch IRA became an important part of many estate plans.

Now that the SECURE Act is in place, most individuals who inherit an IRA or 401(k) from a parent will be required to withdraw everything from the account – and probably pay taxes on it – within 10 years. 

Some heirs will not care about the 10-year requirement and will be eager to withdraw as much as they can, as soon as they can. But others would prefer a stretch-type arrangement, particularly heirs who would inherit these accounts during their peak earning years when they are subject to high income tax rates and don’t need the extra income. Moreover, many parents would feel better knowing that they’re leaving a steady stream of revenue to their heirs over time.

Luckily, this general strategy can still be accomplished through smart planning. A taxpayer can name a charity (or a special type of charitable trust) as the primary beneficiary of the IRA or 401(k), and direct the charity or trust to use those assets to provide an income to an heir for her lifetime.* After the heir’s life, the remaining assets would be used by the charity as the taxpayer has directed.  

This arrangement – a gift to charity that provides an income stream to an individual – is called a “life income gift.” And there are two basic types:

  1. Donors who want to provide an income to heirs that is fixed, never going up or down regardless of what’s happening in the stock market, can establish a charitable gift annuity.

  2. Donors who want to provide an income that is affected by market performance, for better or worse (but hopefully for better over time), can direct their gift to establish a charitable remainder unitrust.

Either type of life income gift can be established from 401(k) or IRA assets at the death of the account holder to provide a life-long income to heirs, as well as support for charity.

But wait! There’s another option…

With the loss of the stretch IRA, some philanthropically-minded taxpayers will choose an even simpler course and name a charity to receive their retirement account without requiring the charity to make payments to an heir. In other words, they’ll leave the account to the charity outright. Because the recipient charity is tax-exempt, the IRA would be paid out to the charity without any taxes being due, allowing every dollar to be used toward that charity’s mission. These taxpayers can substitute other assets to leave to heirs that would not result in a tax bite. For example, when investment assets that have appreciated in the hands of the parent are left to a child when the parent dies, those assets receive a “stepped-up basis.” The child can then sell those assets without owing any tax on the capital gain. 

A charitable strategy that did not change with the SECURE Act

While the SECURE Act changed many rules, it did not change a popular technique that has helped taxpayers support their favorite charities in a tax-efficient way – the qualified charitable distribution or “QCD,” also referred to as the charitable IRA rollover.

As noted above, the Act increased the age at which taxpayers must begin taking required minimum distributions from their retirement accounts, from 70 ½ to 72. However, the Act did not increase the age at which they can begin making charitable gifts directly from their IRA to charity. Taxpayers can still make those QCDs once they reach age 70 ½.

It’s great news that QCDs are still available for folks at that age! It’s also helpful that, when those taxpayers do turn 72, their QCDs will count against the required minimum distributions. 

There is one caveat: The extent to which QCDs can count toward a taxpayer’s required minimum distribution may be reduced if the taxpayer contributes to her retirement account after 70 ½. So if you are considering making a QCD and adding to your retirement account, be sure to discuss this with your financial advisors.

Talk to your advisors…and give us a call!

In fact, this may be a good time to talk to your advisors about reviewing your long term plans to determine whether changes should be made in light of the SECURE Act. The Act has many ins-and-outs. For example, spouses are still able to inherit accounts under much more preferential rules, and there are exceptions to the new 10-year rule for minor, disabled or chronically ill heirs, as well as heirs whose age is within 10 years of the deceased account holder. Plus, Roth retirement accounts are not subject to many of the requirements discussed here. Please note that the pre-SECURE Act rules apply to accounts inherited from people who passed away prior to 2020, so the “old” rules allowing stretch accounts are still applicable for many heirs.

And please give Duke’s Office of Gift Planning a call! We’d be delighted to work with you and your advisors to explore how charitable planning can make you feel better – more SECURE – about the future.


*See Private Letter Rulings: 200230018 (regarding a testamentary charitable gift annuity); 9237020 and 9253038 (regarding a testamentary charitable remainder unitrust). Private Letter Rulings are not binding on the IRS with regard to parties not involved in the Ruling itself. Please also note that the donor’s estate plan should provide for payment of any estate tax attributable to the annuitant’s interest from other assets. These are examples of issues that should be discussed closely with the taxpayer’s professional advisors.

About the authors

142017_arkin_0001_%282%29

Jeremy Arkin Assistant Vice President of Gift Planning

With more than 15 years of experience in gift planning and development, Jeremy helps alumni find ways to support Duke that complement their larger personal and financial goals. He understands the ins and outs of giving techniques that involve tax, retirement and estate planning. He also develops strategies for donating complex assets such as real estate and private business interests. When he's not at work, Jeremy attempts to channel Ron Carter and Ray Brown while playing his double bass.

Jeremy Arkin can be contacted via email or by phone at (919) 613-6195.


phil-buchanan-headshot

Phillip Buchanan Senior Philanthropic Counsel for Duke University

Phil is a veteran of development and gift planning who considers it a privilege to help good people celebrate the joy of giving. He serves as Duke’s senior philanthropic counsel and helps donors, professional advisors and Duke Development officers evaluate the best options for making a charitable gift to Duke. He has been featured in publications such as BusinessWeek and Kiplinger’s. When he’s not at work, Phil attempts to solve the mysteries of the universe for his three inquisitive young sons.

Phillip Buchanan can be contacted via email or by phone at (919) 681-0467.

Make a Gift

With your support, Duke will continue to tackle society's toughest challenges and improve lives worldwide.

Together.

We’re more than a campus in Durham; we are each of you. Only through your support can we continue to save lives, discover treatments and cures, reinvent education, and anchor communities around the world. Our fiscal year ends on June 30 – please make your gift today.