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Sunday February 25, 2024

Case of the Week

IRA Gift to Unitrust, Part 12

Case:

Quentin Charles Douglas was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin and his spouse, Kelly, worked for companies that offered a 401(k) plan. During those years, they put as much into their 401(k) as they could afford to maximize the benefit of employer matching contributions. Eventually, both spouses moved on to other employment and made a tax-free rollover of their 401(k)s into IRAs. As they approached retirement, they continued to contribute to retirement savings by maxing out their IRA contributions each year.

With their lifelong penchant for saving money and some savvy investing, they comfortably retired at age 65. Now, a few years later they are taking required minimum distributions (RMDs) from their respective IRAs. With their lifetime savings, investment income and Social Security distributions, they would like to hedge their retirement security and benefit charity. They have considered creating a charitable remainder unitrust (CRUT).

Question:

Quentin and Kelly wonder if they could use their IRA qualified charitable distributions (QCD) to fund a charitable remainder unitrust with their favorite charity. They sent an email to their trusted advisor to see if this arrangement of using an IRA QCD to fund a charitable trust is possible.

Solution:

Their advisor explained that the Secure 2.0 Act allows a one-time QCD rollover of up to $50,000 from a traditional IRA to fund a life income plan for an IRA owner. To be eligible, the donor must be 70 or older and the distribution must be a QCD from a traditional IRA paid directly to charity. A standard non-assignable two-life charitable remainder unitrust may be funded by two $50,000 QCDs from each IRA owner, for a total funding amount of $100,000.

The Secure 2.0 Act amended Internal Revenue Code Section 408(d)(8) and created a limited one-time election of a QCD into qualified split interest plans. The $50,000 IRA distribution may be to a charitable remainder annuity trust, a standard payout charitable remainder unitrust or an immediate charitable gift annuity. For charitable remainder unitrusts, no additional contributions may be made to the trust and the only funding may be from QCDs. The funding date will be when both QCDs have been received by the trustee. The lifetime income payments must benefit the IRA owner, the IRA owner's spouse or both. Additionally, there is no charitable deduction, the income interest must be non-assignable and all payments from the CRUT will be taxed as ordinary income.

Quentin and Kelly work with their attorney to create a CRUT that conforms with the Secure 2.0 Acts requirements to receive their QCDs as the funding values. After the trust is established, they can complete the QCD form to direct their QCDs of up to $50,000 each to their CRUT, with a total initial funding to the CRUT of $100,000.

If the IRA custodian does not have a specific form, the IRA owner may send a letter to the IRA custodian similar to the following:

IRA CUSTODIAN INSTRUCTION LETTER – IRA GIFT TO UNITRUST
[DATE]
Subject: Request to Initiate IRA Qualified Charitable Distributions to Fund a Unitrust

Dear IRA Custodian,

Federal law permits the account holder of an IRA who is 70 or older to make a Qualified Charitable Distribution ("QCD") directly from his or her IRA to create a life income gift plan with a qualified public charity. It is our intention that the gift be treated as a QCD to fund a charitable remainder unitrust.

Quentin Douglas as owner of IRA Account #12345678 and Kelly Douglas as owner of IRA Account #23456789 that are in the custody of your organization request that you make a $50,000 QCD from each account to the following organization as trustee of a standard charitable remainder unitrust with ourselves as income recipients: $50,000 to [Name of Trustee Charity] with an address of [Address of Trustee Charity] with the following Tax ID Number: [Insert Trustee Charity's Tax ID Number] as Trustee of a Charitable Remainder Unitrust with Quentin and Kelly Douglas as Income Recipients.

We understand that this is a one-time QCD election, we have not made this election previously from IRAs. This letter is sufficient authorization for you to make the respective $50,000 QCD gifts as listed above. However, if you require any further documents, please forward those to us for our signature.

Cordially yours,

Quentin Douglas and Kelly Douglas
cc: Favorite Charity

Published June 30, 2023
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Previous Articles

IRA to Gift Annuity, Part 11

Gifts from IRAs, Part 10

Gifts from IRAs, Part 9

Gifts from IRAs, Part 8

Gifts from IRAs, Part 7

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