meaningful charitable deductions . But the SECURE Act problems remain .
One possible way through the unfavorable tax environment is for IRA or 401 ( k ) account owners to create a pool or pools of money , effective at their deaths , that their children can use later for their annual charitable donations . The owners could create a pool of money by designating a donor-advised fund as beneficiary of all or a portion of the retirement account upon their deaths . The idea is that , if the children are going to be making annual charitable donations throughout their lifetimes , the owners can arrange it so the kids don ’ t end up using largely after-tax funds to make these donations . Instead , they can pull pretax money from the charitable vehicle .
Take Fidelity Charitable ’ s donor-advised fund , which allows an IRA owner to set up multiple giving accounts for multiple heirs . Each inheritor can have his or her own account under this program , Fidelity says .
To see how this strategy would work , let ’ s imagine an IRA owner . He estimates that each of his children , who are in their mid-to-late 50s , will each donate a total of $ 100,000 or more to charity over the rest of their lives . The owner could give each of them $ 100,000 directly from his IRA for this purpose at his death . The problem , we now know , is the SECURE Act : After a direct beneficiary payout of $ 100,000 , each of the children may end up owing $ 40,000 or more in income taxes ( including state income taxes ). That means they have only $ 60,000 remaining to give to charity .
It would be better if all of the $ 100,000 in charitable donations the children made were tax deductible in the decade after their benefactor dies ( and during their peak earning years ). And the possible coming 2026 deduction changes could make this possible . But even so , the children would still be required to donate in an accelerated fashion to avoid the punitive nature of the SECURE Act . And that defeats the owner ’ s purpose of helping the children fund their normal annual charitable gifts with pretax dollars over their entire lifetimes .
So donor-advised funds could still come into play , even if 2026 brings better tax news . If these charitable accounts are funded with IRA or 401 ( k ) account proceeds at the owner ’ s passing , it will not only minimize the SECURE Act ’ s thorny consequences , but it will also help the children avoid income taxes completely on the funds they release to charity each year . The donor-advised fund established by the parents allows the children to make their annual charitable donations using pretax dollars , the SECURE Act notwithstanding .
If the parents opt not to establish donor-advised fund accounts for their children , there may be one other avenue available for the kids to use pretax moneys for charity . If it ’ s after 2025 , and if either the standard deduction or the state and local income tax deduction has been restored to its previous level , the children inheritors could instead donate some IRA proceeds to donor-advised funds they establish themselves , using these funds to make their own future gifts . This possibility exists even before 2026 for a child who has a significant mortgage interest deduction ( for example , more than $ 15,000 for a married couple filing jointly ). The problem , of course , is that the children may not be forward-thinking enough to take this wise step on their own .
For example , if a parent leaves each of two children a $ 1 million IRA , the children could each take $ 100,000 of that as taxable income , even during peak tax bracket years , and then offset all or most of it with tax-deductible charitable contributions to donor-advised funds of their own . The children could then use these funds to make annual charitable donations for the rest of their lives .
Charitable planning this way not only makes sense , it takes only a phone call to the account owner ’ s favorite donor-advised fund to get started .
JAMES G . BLASE , CPA , JD , LLM , is a principal at Blase & Associates LLC . For more on the estate planning techniques described in this article , see Mr . Blase ’ s book entitled Estate Planning For The SECURE Act : Strategies For Minimizing Taxes on IRAs and 401Ks , available on Amazon .
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DECEMBER 2023 | FINANCIAL ADVISOR MAGAZINE | 25