Generally, donors who are over the age of 70 ½ can direct distributions to be made from their individual retirement account (IRA) of up to $100,000 per year to public charities (other than to fund a donor advised fund). This strategy is widely known as the IRA Charitable Rollover or a qualified charitable distribution. Donors who make qualified charitable distributions to charities have the advantage of not having their donation be treated as if it were withdrawn from their IRA and classified as income for tax purposes. The trade-off, however, is the donor does not receive a charitable deduction for the donation. As a result, donors who cannot otherwise use the charitable deduction to fully offset the income from first taking a distribution from their IRA are greatly benefited.

For years many charities and charitable gift planners have advocated for Congress to expand opportunities for donors to make direct charitable contributions from their IRAs to fund split interest gifts. Split interest gifts would include charitable remainder annuity trusts, charitable remainder unitrusts and charitable gift annuities. Each of these gift strategies are important planning tools for individuals who want to commit to a gift. However, they often for some reason either need or want to retain some income before the charity receives an outright gift.

Prior proposals, including the version introduced in the Senate in February 2021 (S.243, known as the Legacy IRA Act), limited the amount that could be contributed in any one year. For example, in S.243, donors could make a qualified distribution of no more than $400,000 in any given year, of which $130,000 could be in the form of outright donations. While one can argue that there should be no limitations, those proposed in S.243 provide meaningful opportunities for donors interested in such planning, particularly when split interest gifts are considered. Indeed, when planners consider whether a charitable remainder trust is appropriate, careful consideration of the gift amount is an important factor when considering the overall cost of administration.

Under the recently proposed Enhancing American Retirement Now Act (the EARN Act – S.4808), a donor may only take advantage of a qualified distribution to fund a split interest gift once during her or his lifetime and the funding is limited to $50,000. While this limit would likely be practical for donors considering a charitable gift annuity, it may not be relevant for charitable remainder trust in many circumstances.

While donors do not ordinarily incur any fees (e.g., legal, accounting) in connection with the purchase of a charitable gift annuity, establishing and maintaining a charitable remainder trust is very different. When a charitable remainder trust is established, legal counsel needs to be retained to prepare the trust and advise the donor, accountants are needed to file gift tax returns, as well as annual returns for the trust. In addition, a person or a financial institution will need to serve as the trustee who will also charge an annual fee for trustee services. In light of all of the expenses associated with establishing and maintaining a charitable remainder trust, it is often an ill-advised charitable vehicle for small trusts.

On the other hand, the EARN Act does provide some interesting opportunities to think about. Under the EARN Act, there are no restrictions as to who a remainder beneficiary can be. Therefore, as long as the split interest trust is otherwise valid (e.g., a charitable remainder unitrust that meets the requirements under IRC Section 664). Thus, it would seem that the remainder beneficiary could be a private foundation or a donor advised fund. Further, there is no minimum duration in which the charitable remainder trust must exist. Therefore, a donor who wishes to transfer funds to a private foundation could do so after a very short-term charitable remainder trust. That said, while these are all interesting options to consider, with a limitation of only $50,000 on a one-time basis, one must question whether or not the opportunity is worth thinking about in the first place.

On the plus side, starting in 2024, the $100,000 maximum annual amount that a donor can contribute directly to charity will be increased by an amount consistent with other costs of living adjustments under IRC Section 1(f)(3)!