Despite uncertain conditions, a recent survey shows that approximately three out of four donors maintained their level of charitable giving in 2022 and expect to maintain or increase their giving in 2023. That said, the enactment of Secure 2.0 and other recent legislative and regulatory proposals described below could affect donors’ strategies for charitable giving starting in 2023.
SECURE 2.0 Act. Perhaps the most impactful of these changes is the SECURE 2.0 Act, which was signed into law Dec. 29, 2022, and applies to all individual retirement account (IRA) distributions made on or after Jan. 1, 2023. This legislation deals primarily with retirement plans, but also implements numerous changes relating to charitable giving. Recall that IRA owners at least 70 ½ years of age can treat up to $100,000 transferred each year from their IRA to a charitable organization as a qualified charitable distribution. This amount has now been indexed for inflation.
Also as a result of the SECURE 2.0 Act, IRA owners at least 70 ½ years of age are permitted to make a one-time transfer from their IRA to a charitable remainder unitrust (CRUT) or to a charity in return for a gift annuity (CGA) that will be treated as a qualified charitable distribution. A CRUT or CGA established in this manner can be funded only with funds from the IRA and no other assets, with a maximum transfer amount of $50,000 (which will be indexed for inflation beginning in 2024). The only permitted beneficiaries of the CGA or CRUT are the IRA owner, the owner’s spouse, or both. While the IRA distribution will be excluded from the IRA owner’s taxable income as a qualified charitable distribution, any distributions received from the CGA or CRUT will be taxed as ordinary income.
Several downsides exist with this one-time qualified charitable distribution permitted by SECURE 2.0 Act. With a maximum distribution amount of $50,000 and the prohibition of contributing additional assets, a CRUT may prove impractical for many donors in relation to the costs of administration. However, some spouses still may find the legislation beneficial when they each contribute $50,000 from their respective IRAs to the same CRUT.
Also, several legal requirements must be satisfied to qualify for the one-time qualified charitable distribution. To qualify, the entire amount used to fund the CGA or CRUT must consist of taxable IRA distributions; the existence of nondeductible contributions to the IRA will prohibit the distribution to a CGA or CRUT from being a qualified charitable distribution. Further, the charitable organization connected to the CGA or CRUT must be a public charity other than a supporting organization and cannot be made to or for a donor-advised fund (DAF) or private nonoperating foundation.
Further, with respect to CGAs, the income interest must be nonassignable and the CGA must pay a minimum of 5% of the contribution amount to the annuitant. This threshold payout rate may be problematic as many charities rely on the American Council of Gift Annuities recommended rate, which currently sits at 5.9% for an annuitant at age 70. However, if interest rates fall to or below prior levels and the American Council of Gift Annuities adjusts its recommended rates accordingly, it may be difficult for both spouses to satisfy this 5% requirement (e.g., in December 2022, the recommended rate from the American Council of Gift Annuities was 4.8% for an annuitant at age 70). Payments from the CGA also must begin no later than one year from the date of funding, meaning deferred gift annuities are not permissible.
Finally, an unresolved issue with SECURE 2.0 Act is its impact on the 3.8% net investment income surtax, which is imposed on individuals with adjusted gross income over $200,000 and married-filing-jointly taxpayers with adjusted gross income over $250,000. Normally, IRA distributions are not subject to the tax while income received from a CGA or CRUT would be subject to the tax. It remains unresolved as to whether income received from a CGA or CRUT that was funded as part of this one-time qualified charitable distribution (with solely IRA assets) would avoid the net investment income surtax.
2024 Green Book. On March 9, 2023, the Department of the Treasury released its 2024 revenue proposals, known colloquially as the Green Book. Several proposals were designed to “close loopholes” relating to the minimum distribution requirements for private foundations. Recall that nonoperating private foundations must distribute at least 5% of the total fair market value of their noncharitable use assets from the prior tax year to avoid an excise tax on the undistributed amount under Section 4942 of the Internal Revenue Code.
Currently, private foundations generally can satisfy their minimum distribution requirements by making distributions to a DAF. The first of these Green Book proposals would seek to remove such distribution’s treatment as a qualifying distribution since “it is not appropriate for a private foundation to satisfy its distribution requirement by making a distribution to a DAF” when a private foundation has advisory privileges over a DAF and DAFs are not required to make a distribution of the funds for a charitable purpose within any determined period of time. Accordingly, the Green Book proposal would treat distributions by a private foundation to a DAF as nonqualifying distributions for purposes of the minimum distribution requirement unless (1) the DAF funds are expended as a qualifying distribution, which does not include a distribution to another DAF, by the end of the following taxable year and (b) the private foundation maintains adequate records or other evidence showing that the DAF has made a qualifying distribution within the required time frame.
The Green Book also would seek to limit the ability of private foundations to meet their minimum distribution requirements through payments to disqualified persons. Currently, private foundations’ payments to disqualified persons for personal services reasonable and necessary to carry out the organizations’ exempt purposes are considered qualifying distributions. Treasury’s position in the Green Book is that treating such payments to disqualified persons as qualifying distributions defeats the intent of the minimum distribution rules requiring that the private foundation distribute funds each year for an exempt purpose. Accordingly, the Green Book’s proposal would prohibit payments to disqualified persons for personal services from being treated as qualifying distributions for the purposes of the minimum distribution rules. Notably, however, the Green Book proposal did not seek to alter the existing rule that such a payment is not considered an act of self-dealing.
The Charitable Act. Senate Bill 566 was introduced earlier this year to address the ability to take above-the-line charitable deductions. The current Section 170(p) of the Internal Revenue Code allowed a deduction of up to $300 ($600 if filing jointly) for contributions made in the 2021 tax year by taxpayers who do not itemize their deductions on their return. The proposed Charitable Act legislation would amend Section 170(p) of the Internal Revenue Code to allow a deduction in the 2023 and 2024 tax years for a taxpayer who does not itemize in an amount up to one-third of the taxpayer’s standard deduction.