December 2024 Professional Advisor News

As professional advisors, you’re very aware of potentially significant upcoming changes to the tax laws that could impact your high-net-worth clients. Whether or not a post-election Congress takes action to prevent the estate tax exemption sunset at the end of 2025 will potentially affect the way you design your clients’ wealth transfer strategies.

During this phase of uncertainty, it may be useful to reflect on historical estate tax changes to see how similar situations have been resolved in the past, while at the same time taking a practical approach and advising clients that, while commentators may speculate, it is still impossible to accurately predict what might happen. Estate taxes certainly will continue to be on the minds of leaders in the charitable sector for many months to come.

As you and other tax planning professionals watch and wait, it is important to keep charitable planning high on your list of strategies that could help blunt the impact of a lower estate tax exemption if the sunset were to occur. That’s because gifts to nonprofit organizations are deductible from a client’s taxable estate. Even during this era of uncertainty, be sure to keep in mind an important planning technique for your charitably-inclined clients that delivers multiple tax benefits and offers some degree of flexibility: naming a nonprofit organization, such as a fund at GiveWell Community Foundation, as the beneficiary of an IRA or other qualified retirement plan.

Here’s why this is such a powerful technique, especially now:

Income tax savings. When your client designates a fund at the Community Foundation as the beneficiary of an IRA, the fund receives the assets without having to pay income taxes. This is because 501(c)(3) Public Charities, (including the Community Foundation) are tax-exempt entities, allowing them to receive funds from qualified retirement accounts tax-free after your client’s death. This is not the case with qualified retirement plans flowing to heirs; the income tax hit can be significant.

Estate tax deduction. Naming a nonprofit organization as a beneficiary of a retirement plan results in an estate tax charitable deduction, which reduces any applicable federal estate taxes. This means that the full value of the IRA can flow into your client’s fund at the Community Foundation free from the estate tax burden.

Flexibility. Clients can revise IRA beneficiary designations anytime during their lifetimes. So, as the end of 2024 draws closer, a client can update an IRA beneficiary designation to name a fund at the Community Foundation, which would protect against a drop in the estate tax exemption. If the sunset does not occur, the client could of course revise the beneficiary designation to leave a greater portion of retirement plan assets to heirs. Remember, though, that the income tax hit will still apply to proceeds flowing to heirs. That’s why many of your charitable clients will choose to leave IRAs to their funds at the Community Foundation even if the estate tax exemption does not sunset. And, of course, many clients truly want to leave a legacy and would love to incorporate charitable giving into their estate plans regardless of what happens with the tax laws. As a tax and estate planning advisor, it is your responsibility – and opportunity – to help clients achieve their philanthropic wishes.

Please reach out to dive deeper into the ways you can help your clients fulfill their charitable goals, especially during this time when future tax laws are up in the air. We are here to help!

As you and other professional advisors put the finishing touches on implementing clients’ year-end charitable giving plans, you may have a moment when it hits you: “Wait, how exactly does a Qualified Charitable Distribution work?”

That’s a great question, and you are not alone if you’re asking. Even though QCDs are well-covered in financial media, they’re complex enough that it’s hard to remember the nuances when you’re hit with a situation where a client might benefit.

The professional staff at GiveWell Community Foundation is here for you! Please reach out with any of your charitable giving questions, including the most common questions about QCDs:

“Is an IRA the only eligible source for Qualified Charitable Distributions?”
Short answer: Almost.

Long answer: An individual can make a Qualified Charitable Distribution directly to an eligible nonprofit organization from a traditional IRA or an inherited IRA. If the individual’s employer is no longer contributing to a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA, the individual may use those accounts as well. In theory, a Roth IRA could be used to make a QCD, but it is rarely advantageous to do that because Roth IRA distributions are already tax-free.

“What is the difference between a QCD and an RMD?”
Short answer: Quite a bit! But a QCD can count toward an RMD.

Long answer: Everyone must start taking Required Minimum Distributions (RMDs) from their qualified retirement plans, including IRAs, when they reach the age of 73. RMDs are taxable income. The Qualified Charitable Distribution, by contrast, is a distribution directly from certain types of retirement plans (such as IRAs) to certain types of nonprofit organizations. A QCD can count toward the taxpayer’s RMD for that year. And because the QCD goes directly to a nonprofit organization, such as a fund at the Community Foundation, the taxpayer is not taxed on that distribution.

“Can a taxpayer make a Qualified Charitable Distribution even if the taxpayer is not yet required to take Required Minimum Distributions?”
Short answer: Yes – within a very narrow age window.

Long answer: RMDs and QCDs are both distributions that impact retirement-age taxpayers, and it would seem logical that the age thresholds would be the same. Under the SECURE Act, though, the required date for starting RMDs shifted from 70 ½ to 72 and is now up to 73 (which is better for taxpayers who want to delay taxable income). A corresponding shift was not made to the eligible age for executing QCDs; that age is still 70 ½ (which benefits taxpayers who wish to access IRA funds to make charitable gifts even before they are required to take RMDs).

“Can my client direct a QCD to a fund at the Community Foundation?”
Short answer: Yes, if it’s a qualifying fund.

Long answer: While donor-advised funds are not eligible recipients of Qualified Charitable Distributions, other types of funds at the Community Foundation can receive QCDs. These funds include designated funds, field-of-interest funds, and agency funds established by nonprofit organizations.

“How much can my client give through a QCD?”
Short answer: $105,000 per year in 2024, increasing to $108,000 in 2025.

Long answer: A Qualified Charitable Distribution permits a client (and a spouse from a spouse’s own IRA or IRAs) to transfer up to $105,000 in 2024 (and $108,000 in 2025) from an IRA (or multiple IRAs) to a qualified nonprofit organization. So, a married couple may be eligible to direct up to a total of $210,000 in 2024 to charitable organizations from IRAs and avoid significant income tax liability.

The Community Foundation is here to help you and your clients tap the potential of QCDs. Please reach out! We’d love to talk about a QCD strategy for your clients’ immediate gifting needs and their charitable goals.

At GiveWell Community Foundation, we’ve been asked by professional advisors for “cheat sheet” resources to make it easy to determine which type of charitable planning tool is best for a particular client. We actually love that idea! We’re always happy to be a sounding board for any client situation where charitable giving is an option. Please reach out anytime you and a client are discussing philanthropy. To get your wheels turning, here are three scenarios for consideration.

Streamline and tax-optimize charitable giving
If: Your client supports many different charities every year…

Then: A donor-advised fund at the Community Foundation can be an excellent tool to help a client organize their giving to a favorite charitable cause, such as local nonprofit organizations, places of worship, and an out-of-state alma mater. Clients appreciate how easy it is to support multiple nonprofits while the Community Foundation’s systems keep track of everything. Plus, clients can give stock and other appreciated assets to their donor-advised funds, often avoiding capital gains tax and simplifying tax receipts to provide their accountants when tax time rolls around.

Support a specific nonprofit while minimizing risk
If: Your client has supported a particular nonprofit for many years, intends for that support to continue, and also wants to be sure that the funds are used effectively …

Then: Through a designated fund at the Community Foundation, a client can make tax-deductible gifts – during life and through estate gifts – that are set aside to be used exclusively for a particular organization. The Community Foundation makes distributions from the fund according to the client’s wishes. An advantage of a designated fund is that the assets are out of creditors’ reach if the nonprofit were to run into financial trouble or if you add a sizeable amount to the fund that you would like to be distributed annually to the designated nonprofit for years to come. Plus, a client who is 70 ½ or older can make Qualified Charitable Distributions up to $105,000 per year (increasing to $108,000 in 2025) from IRAs to a designated fund.

Leave a charitable bequest and reap significant tax benefits
If: Your client intends to provide for charities in an estate plan and owns an IRA or other qualified retirement plan …

Then: By naming a fund at the Community Foundation as the beneficiary of a qualified retirement plan, your client achieves extremely tax-efficient results. Not only is estate tax avoided on the retirement plan assets flowing to the charitable fund, but income tax is also avoided. Indeed, the income tax hit on retirement proceeds left to heirs can be steep.

The bottom line here is this:

If you encounter any situation with a client where charitable giving could be involved …

Then please reach out! Most of the time, we can offer a solution that meets both the client’s tax and estate planning goals and the client’s objectives for supporting their favorite charitable cause. At the very least, we can point you in the right direction.