Tax-wise estate gift with fixed income to beneficiaries – a stretch option for IRA assets

A client who wants to provide a loved one with fixed income for life might include provisions for a testamentary charitable gift annuity in their estate plan. This has become a hot topic in planning.

In 2019, the SECURE Act eliminated the “stretch” distribution of individual retirement accounts (IRAs) and qualified plans assets to most non-spouse beneficiaries. Clients are seeking ways to regain the stretch, thereby reducing the tax burden of beneficiaries having to take the entire IRA distribution within 10 years. Two testamentary options offer such relief: charitable remainder trusts (CRTs) and charitable gift annuities (CGAs).

You will notice the “charitable” component in both names — IRA assets can transfer from a deceased account owner directly to either a 501(c)3 charity or a CRT without incurring immediate income taxation because they are tax-exempt entities. When an IRA funds a testamentary CGA, the beneficiary/annuitant (person receiving payments) gets fixed payments for life that are 100% taxed at ordinary income tax rates — stretch achieved!

A charitable gift annuity (CGA) is a simple contract with a charity that provides fixed income for one to two individuals for life in exchange for a gift of cash, appreciated securities, real estate or other assets. CGAs can be testamentary or done while living. They are most popular with those in the following situations:

  1. Charitable seniors desiring fixed income for life at rates higher than they are finding elsewhere.
  2. Investors with highly appreciated assets wanting to offset the tax burden.
  3. Charitable individuals wanting to provide for a spendthrift with income they can't outlive with none of the administration/trustee fees that diminish the available funds as happens with a trust.

Major advantages of choosing a CGA over a CRT:

  • Lower funding minimums. The American Heart Association’s minimums, for example, are $5,000 for a CGA, $100,000 for a CRT.
  • There are no execution or administration fees.

How does a testamentary CGA with the American Heart Association work?

The client includes wording provided by the AHA in his estate documents (will/trust/beneficiary designation form). If the funds come directly from the estate to the AHA, the estate receives the tax deduction. If the client prefers the annuitant receives the income tax deduction, they can specify their intention for the beneficiary to enter into the CGA contract with the AHA (implies a certain level of trust that the beneficiary will comply with client wishes).

The fixed payment to the annuitant is equal to the value of the property transferred to the AHA multiplied by the CGA rate published by the American Council on Gift Annuities for a person of annuitant’s age at the time of the client’s death. The AHA begins payments at age 65. If the annuitant is under 65, the estate documents specify a deferred payment CGA contract until the annuitant turns 65. Payments continue for the annuitant’s life. It is imperative that clients choose a charity with a strong history of financial strength like the AHA because if the charity dissolves, so do the payments.

Tax proposals currently in Congress could increase estate and capital gains tax, eliminate the step-up in basis to beneficiaries and impose capital gains tax on beneficiaries even if they don’t sell appreciated property. That's why testamentary CGAs are sure to become an even hotter topic. The AHA has dedicated staff to help you help your clients. Request your copy of our Smart Solutions Charitable Gift Annuity brochure, personalized gift illustrations for your clients, sample wording and more. 

About the Author:

Lauren Photo

Lauren Iwema, CAP®

Senior Advisor, Charitable Estate Planning
American Heart Association
[email protected]

“I work with supporters and their advisors to develop personalized solutions for tax and charitable planning needs.”

Lauren Iwema has worked with the American Heart Association since 2005 and has eight years of experience in charitable estate planning and complex gift planning. She was inspired to join the organization during her niece Maggie’s struggle with cardiomyopathy at 2 months old. Sixteen years later, she’s as passionate about the AHA’s lifesaving mission as Maggie is for reading.