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Enhancing Your Legacy: Charitable Trust Opportunities Under the SECURE Act 2.0

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December 20th, 2023

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Charitable giving is an important way to support your local community and share your legacy. Your donation builds goodwill, strengthens relationships, and helps bridge some of society's social and economic gaps. Charitable giving can also be an important tool when it comes to retirement strategies and tax planning. Through savvy planning, your donations can help you defer or reduce taxes and expand your charitable trust opportunities, especially with the new provisions in the updated SECURE Act 2.0.

Unsure where to begin? Here's a quick guide to the SECURE Act, its impact on beneficiaries of charitable trusts, and other wealth transfer strategies.

What is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is legislation designed to help more Americans save for retirement. Created as part of a comprehensive spending and tax extension bill that was signed into law in 2019, the SECURE Act makes it easier for employers to offer tax-advantaged savings plans to their employees—and easier for employees to participate in these plans. The SECURE Act is an attempt to address the shortfalls in retirement savings that many Americans face as they age. Longer life expectancies, coupled with the rate of inflation, means that a minimum balance of $1 million is often recommended for people to have in their retirement accounts if they plan to stop working entirely.

To aid people's efforts in saving for retirement, the original SECURE Act offers a number of benefits, which includes removing maximum age limits on retirement contributions (previously capped at age 70 ½); allowing long-term, part-time employees to also receive retirement benefits, permitting penalty-free withdrawals of up to $5,000 from retirement plans for childbirth or adoption, and penalty-free withdrawals of up to $10,000 from 529 education savings plans for the repayment of some student loans; and making it easier for small business owners to offer 401(k) plans to their employees and add tax credits and different protections on collective Multiple Employer Plans; among other elements.

In 2022, Congress passed the SECURE 2.0 Act, which builds on the original law and expands the original SECURE Act's retirement-savings opportunities. The goal was to create legislation that could help people save more for retirement, improve rules relating to retirement and savings, and lower the cost of setting up a retirement plan for employers.

More than 90 provisions are included in the SECURE 2.0 Act that promote savings, boost incentives for businesses, and offer improved flexibility for those saving for retirement. Some of these provisions went into effect as of January 1, 2023, while others will not go into effect until 2024, 2025, and beyond. These provisions include an automatic 401(k) enrollment for employees, new required minimum distribution (RMD) rules that increase the minimum distribution age to 72, expanded access to retirement funds, tax benefits for employers, and more.

What are the benefits for charitable trusts?

Before the SECURE Act, individuals could transfer up to $100,000 per year directly from an individual retirement account (IRA) to a qualified 501(c)(3) charity organization without incurring taxes on the distribution. This qualified charitable distribution represented a tax-efficient way for taxpayers aged 70 ½ years and older to donate funds from their IRA; these donated funds would count towards an individual's RMD for the year.

The SECURE Act 2.0 has several new provisions relating to charitable trust donations. Beginning in 2024, the maximum qualified charitable distribution amount of $100,000 will be annually indexed for inflation, which allows individuals to make larger charitable contributions over time through qualified charitable distributions.

These types of deductions are eliminated from income, not subject to charitable deduction income limits, and not treated as an itemized deduction—meaning a donor can remove qualified charitable distributions from their adjusted gross income (AGI) and use the standard deduction at tax time. Because qualified charitable distributions reduce AGI, it can result in greater Social Security benefits and a lower Medicare surcharge.

This year, qualified charitable distributions of $50,000 or less can be transferred from a traditional IRA to a “split-interest" entity, such as a charitable remainder trust (CRT), charitable remainder unitrust (CRUT), or charitable gift annuity (CGA), which will pay a 5% minimum fixed percentage over the lifetime of the donor or their spouse.

Although these types of qualified charitable distributions don't qualify for a charitable contribution deduction, it satisfies all or part of the RMD of the donor. Not only would these distributions remove a significant portion of taxable income, it would allow for cash flow from the gift to the donor. At the end of the donor's lifetime, the charity would keep the funds.

It's important to note that this type of transfer can only be made for a maximum of $50,000 during a single tax year, though smaller amounts can be combined to reach $50,000 each year. (The $50,000 cap will be adjusted for inflation in later years.)

How are inherited IRAs affected?

Prior to the SECURE Act, individuals who inherited an IRA or a 401(k) could stretch their taxable distributions and tax payments over the span of one's life. In this way, these “stretch" IRAs and 401(k)s could serve as a reliable source of income for life.

The original SECURE Act required most beneficiaries of inherited IRAs (from original owners who passed away on or after January 1, 2020) to withdraw assets within 10 years of the original owner's death. The SECURE Act 2.0 requires distributions to be made at least as rapidly as the original IRA owner had been receiving them for the next decade, with a complete distribution by year 10.

Depending on one's situation, there are three possible strategies for people who inherit an IRA or 401(k) amid the SECURE Act 2.0:

  • Withdraw funds as evenly as possible over the next 10 years, which smooths the impact of the additional taxable income and helps lower the risk of bumping an individual into a higher marginal tax bracket.
  • Wait until the end of the 10-year period, then withdraw all assets at once.
  • Make withdrawals of irregular amounts over the 10-year period, in order to smooth out taxable income and tax liability. For example, if you're retiring shortly and will no longer receive a salary, or are moving to a state without income taxes.

There are a few exceptions; individuals who inherit an IRA or 401(k) from their spouse can still “stretch" their RMDs over the course of their lifetime. (The Secure Act 2.0 also allows spousal beneficiaries to be treated as the original owner of the retirement plan, allowing for more advantageous RMD timetables for distributions.) People can also stretch distributions if they are less than 10 years younger than the original owner, someone disabled or chronically ill, or a child (not a grandchild) of the original owner who is a minor, in which case the 10-year clock begins once the child reaches age 21.

Diversifying for success

If you're thinking about leaving a legacy by making a donation to charity and are 70 ½ or older, it's prudent to consider the SECURE Act 2.0's new split-interest Qualified Charitable Distribution. You can benefit from continuing cash flow as well as reduce your tax liability.

Charitable Remainder Trusts (which distribute payments to you or your beneficiaries for a set term, then disburse the remainder to charity) and Charitable Lead Trusts (which distribute payments to a charity for a set term, then disburse the remainder to your beneficiaries) are just two ways you can leverage charitable trusts to gain valuable tax and wealth transfer benefits.

It's important to discuss these opportunities with your financial advisor and loved ones. Regularly revisit your estate plans and make any updates to align your goals with these types of changes.

For more than 125 years, Bank of Hawaii has served local families and protected our customers' investments. If you're interested in speaking with one of our financial advisors to discuss wealth management options, reach out to your dedicated Relationship Manager today.

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