Some feel a philanthropic tug on their heartstrings from time to time, while others make charitable donations an integral part of their financial plan. Whether you fall into one category or the other, knowing the qualified charitable distribution rules in 2023 that could be impacting your estate can help you leverage your donation—and minimize your taxation.
The qualified charitable distribution rules have, in previous years, not been set in stone according to the IRS. In 2022, however, the IRS has declared that charitable donations made from one of your tax-deferred accounts will be exempt from taxation up to $100,000 as long as the distribution comes from a qualified account and is donated to a charity that meets the IRS stipulations. The IRS has enacted this as a permanent rule moving forward as of next year.
This is good news for IRA owners that would like to be generous with their funds, while at the same time lowering their overall estate and avoiding taxation on their distribution. As a wealth management strategy, the qualified charitable distribution rules could play a pivotal role in your estate moving forward. If you can better educate yourself on these rules and regulations, and work alongside a trusted advisor, you can leave a legacy for your family and for your favorite causes that will have an impact well beyond your lifetime.
What Are the Qualified Charitable Distribution Rules in 2023?
The new ( QCD) qualified charitable distribution rules in 2023 can and should play an influential role in how you withdraw funds from your retirement accounts. As an example, when you reach the age of 73, you will need to withdraw a required minimum distribution from all of your qualified accounts (the specific amount will be calculated using your age and total account value).
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The IRS determines the amount of money that you are required to withdrawal from your qualified accounts, therefore guaranteeing that you will be paying taxes on that previously untaxed money. However, if you are able to leverage the qualified charitable distribution rules, you can avoid paying taxes on IRA distributions of up to $100,000 a year. This is one of many IRA solutions available to retirement investors; depending on your situation and charitable appetite, it could be a great strategy for you. For instance, if your RMD falls under the $100,000 mark every year, you have the option to nullify any future taxes on that account.
The two major benefits in that scenario are that you are helping to sustain the charity of your choice while minimizing or negating taxes on your qualified accounts—a great strategy that many advisors aren’t talking about. However, if your required minimum distribution is above the $100,000 mark, with the help of a knowledgeable advisor, you can still utilize this opportunity for the first $100,000 and develop a strategy for the remainder.
How to Leverage Your Charitable Distribution
While lowering your overall estate is a great reason to use the qualified charitable distribution rules to your advantage, you likely would like to see the charity of your choice leverage that donation as well. And there are multiple options that would allow them to do just that. Once you’ve consulted with an expert insurance advisor and determined that the QCD is a strategy that you would like to use, you can begin to discuss specific opportunities that will allow your favored charity to leverage your donation to its fullest.
If the charity or organization is willing to work with you, your advisor, and possibly your estate planning attorney, they could, in fact, leverage a life insurance policy to maximize and enlarge your original donation amount. The charity could take out a life insurance policy on you, using your donation, or they could take out a life insurance policy on your spouse. They could even use what’s traditionally called a “last to die” insurance policy, which would pay out when both you and your spouse pass away. This type of life insurance policy usually yields a higher death benefit since the overall life expectancy is longer.
Then, the charity, while working with you and an estate planning attorney, could place that life insurance policy in an Irrevocable Life Insurance Trust (ILIT), which would allow them to borrow against the policy to essentially gain immediate access to funds if needed. If you are able to commit to the same donation to that charity year after year, they could take out a much larger life insurance policy than they could by just purchasing a policy using the one-time lump sum donation.
You would have the advantage of negating taxes (up to $100,000 a year) on your qualified account, while leveraging that money and your philanthropic tendencies. Any possible taxation to the charity is usually skillfully avoided. Taxation on the life insurance benefit itself is rare, but would vary depending upon the state in which the charity resides, the amount gifted, and a few other factors so, again, you will want to consider all of these options under the guidance of a knowledgeable professional. However, if strategically implemented, this approach could quite literally open new doors for your favored organization for years or decades to come.
How the QCD Rules Fit Into Your Wealth Management and Estate Plan
The qualified charitable distribution rules are here to stay—and can be an instrumental tool for your overall wealth management strategy. The rules apply to IRA accounts, but with a properly structured rollover strategy, the rules are favorable for generous investors who own other qualified accounts. Qualified plan assets can be rolled over to an individual IRA, allowing future QCD’s to be directed directly to a qualified charity. In addition, when the investor is able to couple their donation with life insurance via a trusted insurance advisor, it can be a major leverage point in managing estates and wealth.
By working with a trusted insurance advisor, you will be better able to determine the advantages of life insurance in regards to your situation and your overall wealth management plan. 2022, and all subsequent years, should prove to be more favorable for your estate and your wealth overall. With the solidification of the qualified charitable distribution rules moving forward, you now have another wealth management strategy available to you and to your heirs.
Howard Kaye Insurance has been advising clients on annuities, estate planning, and life insurance for more than 55 years. We have developed strategies specifically for using qualified charitable distribution rules to minimize taxation and maximize charitable donations. Contact a Howard Kaye advisor at 800-DIE-RICH to discuss the qualified charitable distribution rules today.
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