Learn About The New “Legacy IRA”

Now being called “Legacy IRAs” a few changes set forth in the “SECURE 2.0” act have created a new way for retired individuals to give to a qualified charitable organization while possibly lowering their taxable income and decreasing their required minimum distributions. Let’s learn about it.

The Basics of IRAs and RMDs

For context, we need to discuss the basic functionality of an IRA (Individual Retirement Account) and their RMDs (Required Minimum Distributions). Because IRA’s grow tax free, the IRS begins requiring you to take required minimum distributions each year at the age of 73. This is reported as taxable income, and without RMDs your IRA could continue to grow tax free until your death. Which the IRS doesn’t want it to do.

The 2019 SECURE act made provisions for the “planned giving” where an individual can donate some of their retirement money to qualified charitable organizations, thereby reducing the amount that is taxable.

What are the Changes in the “SECURE 2.0”

There were many changes made with the passing of the “SECURE 2.0″, but there are two primary changes we want to talk about in relation to planned giving and “Legacy IRAs.”

1- In the SECURE act, the amount of money you could donate annually was capped at $100,000. Donated money does not have to be counted as income or taxed. The SECURE 2.0 act will allow this cap to increase over time for inflation.
2- SECURE 2.0 also includes the provisions that allow for the “Legacy IRA” by expanding the qualified charitable distribution. This contribution is a one-time qualified charitable distribution (QCD) up to $50,000 that is transferred into a split-interest vehicle. This can be done using a charitable gift annuity or a charitable remainder unitrust.

Legacy IRA Trusts and The Benefits

Because we are estate planning attorneys, we are going to focus on the trust side of this new legislation. If you use a charitable remainder unitrust (CRUT) you are making an irrevocable gift to the qualifying 501(c)3 public charity of your choice. This means that it is permanent, and you cannot undo this. During your lifetime, the trust will pay you interest annually (typically 5-6% of the value of the trust.)

If you can make this contribution before you begin paying RMDs, this can lower the total amount in your IRA, effectively lowering your future RMD. In addition, you receive the interest payments annually, which do count as income and are taxed. For most people, when you do the math, this still results in overall tax savings, with the bonus of a small amount of added income and the ability to contribute in a meaningful way to the charity of your choice.

If you do decide to create a CRUT, it is smart to find a charity that will do all the work for you. You may be able to donate your money to a charity that will run the trust, send you the interest check, send you the proper reporting, and keep your costs to a minimum. If you can’t find that, you can look into the charitable annuity. The benefits of the annuity are more limited, but it is also less work.

Contact Voyant Legal Today

(add text) Although we are experienced estate planning attorneys, this blog is for educational purposes only. If you need legal advice about how to move forward with your IRA, RMDs, and QCDs, contact a qualified Estate Planning Lawyer today. We have seen the devastating effects of not doing planning.

To listen to our full podcast about “Legacy IRAs,” click here.