Throughout the remainder of the year, there will be ongoing discussions of major changes to the income and transfer tax systems, including the incentives to charitable giving. One piece of legislation gaining bipartisan support is HR 2954 Securing a Strong Retirement Act of 2021.1 Section 309 would provide a “One-Time Election for Qualified Charitable Distribution to Split-Interest Entity” which is defined as charitable gift annuities, unitrusts and annuity trusts within the meaning of the Code plus additional requirements.
Section 309 would add subparagraph (F) to sec. 408(d)(8) imposing the following requirements:
First, there must not be an election for a preceding year. In other words, the election can be made only once.
Second, the aggregate amount of the distributions subject to the election may not exceed $50,000.
Third, a distribution is a Qualified Charitable Distribution to the extent it is otherwise deductible, ignoring the AGI limitations otherwise imposed by sec. 170.
EXAMPLE: Let’s assume a donor (age 71) uses $50K from an IRA to fund a charitable gift annuity paying 5% for her lifetime. The present value of the remainder interest turns out to be $19,318. The remaining $30,682 is considered ordinary income. The same limitation would also apply to charitable gift unitrusts and annuity trusts.2
Under these assumptions, not only is there no tax deduction, but part of the distribution will be taxable, unlike an outright qualified charitable distribution.
Fourth, the measuring life of the income interest can only be the account owner, the spouse of the account owner or both. There will be no possibility to utilize the split-interest arrangement to extend deferral for the benefit of a child or grandchild.
Fifth, the split-interest entity must be exclusively funded with the qualified charitable distribution. Time will tell if there is a “market” to administer remainder trusts with such a comparatively small sum of funds. A charitable gift annuity must have a minimum payout rate of 5% and commence payments within a year.3
Sixth, the income interest must be nonassignable. Additionally, in determining the taxability of payments from the charitable remainder trust and gift annuity, the regular tier accounting and sec. 72 recovery of basis rules do not apply. The result will make all of the payments from the gift annuity fully taxable from the first payment. For remainder trusts, all the payments should be taxed as ordinary income.
The proposed effective date of these changes would be for all distributions made in the tax years ending after the date of enactment. If this way of giving is of interest, then the account holder must be prepared to act quickly.
If enacted, sec. 309 would bring a measure of parity for split-interest gifts and outright QCDs. The exclusion of distributions from AGI will limit the taxability of Social Security benefits, limit exposure to the 3.8% net investment income tax and improve the chances of deductibility of unreimbursed medical expenses and the deductibility of up to $25,000 in passive activity losses.
As I read the proposed legislative language, some questions arise. Can a donor make an outright QCD and a split-interest QCD in the same year? I am not seeing an explicit prohibition, but clarification is welcomed. If two different types of QCDs can be made in the same year, is the maximum $150,000 or $100,000?
Just as the IRS provided guidance for QCDs,4 this provision will need similar guidance. Hopefully, it will permit pledges to be satisfied with a split-interest QCD without violating the self-dealing prohibited transaction rules.
By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
1. See https://www.congress.gov/bill/117th-congress/house-bill/2954/text for a copy of the proposed legislation. ↵
2. See section 309 adding sec. 408(d)(8)(v) which will require ignoring the tier accounting rules for remainder trusts and the recovery of basis rules for gift annuities. ↵
3. The proposed legislation imposes a minimum payout rate presently higher than the minimum ACGA-suggested rate of 4.8%. See https://www.acga-web.org/current-gift-annuity-rates. ↵
4. Notice 2007-7, 2007-5 IRB 395. ↵
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