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How to Use Qualified Charitable Distributions in Estate Planning

Serving Clients in the Gilbert, Arizona Area

How to Use Qualified Charitable Distributions in Estate Planning
Gilbert Arizona estate planning attorney

BY: Jake Carlson

Jake Carlson is an estate planning attorney, recognized business leader, inspiring presenter, and popular podcast host. He is personable and connects immediately with others. A natural storyteller, he loves listening to your story and exploring what matters most to you.

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A qualified charitable distribution is a direct transfer of traditional IRA funds to a qualified charity.

Assets held in Individual Retirement Accounts (IRAs) are unquestionably the best assets to gift to charity, since IRAs are loaded with taxes. One way to relieve this tax burden is by using the IRA for charitable distributions during your lifetime, says a recent article, “Giving funds in IRAs to charity with QCDs,” from Investment News.

Most people who give to charity don’t receive the taxable benefit because they don’t itemize deductions. They instead use the higher standard deduction, which offers no extra tax deduction for charitable giving.

Older taxpayers are more likely to use the standard deduction, since taxpayers aged 65 and older receive an extra standard deduction. In 2022, the standard deduction for a married couple filing jointly when each of the spouses are 65 and older is $28,700. The exceptions are couples with large medical expenses or those who make large charitable distributions.

Here’s where the IRA for charitable giving comes in. IRAs normally may not be given to charity or anyone in the owner’s life (except in the case of divorce). There is one exception: giving IRAs to charity with a QCD.

The QCD is a direct transfer of traditional IRA funds to a qualified charity. The QCD is an exclusion from income, which reduces Adjusted Gross Income. AGI is the most significant number on the tax return because it determines the availability of many tax deductions, credits and other benefits. Lowering AGI with a QCD could also work to reduce “stealth” taxes–taxes on Social Security benefits or Medicare premium surcharges.

QCDs are limited to $100,000 per person, per year (not per IRA). They can also satisfy RMDs up to the $100,000, but only if the timing is right.

There are some limitations to discuss with your estate planning attorney. For instance, QCDs are only available to IRA owners who are 70 ½ or older. They can only be made once you turn age 70 ½, not anytime in the year you turn 70 ½. The difference matters.

QCDs are not available from 401(k) or other employer plans. They also aren’t allowed for gifts to Donor Advised Funds (DAFs) and private foundations, and they can’t be made from active SEP or SIMPLE IRAs, where contributions are still being made.

Appreciated stocks can also be gifted to qualified charitable distributions and itemized deductions taken for the fair market value of the stock, if it was held for more than one year. There’s no tax on appreciation, as there would be if the stock were sold instead of gifted.

There are some tax traps to consider, including the SECURE Act, which allows traditional IRAs to be made after age 70 ½. However, it pairs the provision with a poison pill. If the IRA deduction is taken in the same year as a QCD, or any year before the QCD, the QCD tax exclusion could be reduced or lost. This can be avoided by making Roth IRA contributions instead of tax-deductible IRA contributions after age 70 ½.

Speak with your estate planning attorney about whether using a QCD makes sense for your estate planning and tax situation.

To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.

Reference: Investment News (Dec. 9, 2022) “Giving funds in IRAs to charity with QCDs”

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