How Advisors Can Help Clients Benefit From Legacy IRAs

In an earlier article, semiretired advisor and educator Kathleen Rehl explained how Secure Act 2.0 allowed her to set up a legacy IRA rollover to a charitable gift annuity. We noted that the potential benefits of the new legacy IRA rules are threefold. First, they allow donors to enhance their charitable giving legacy and ensure their future charitable intentions are fulfilled. Second, they reduce the donor’s tax bill in the year the CGA is created by excluding the amount contributed to the CGA from taxable income. And third, they create a stable lifetime income stream that can be paid to the donor and/or their spouse. In this article, Kathleen explains how advisors can help their clients benefit from the new legacy IRA rules.

Legacy IRA Offers Unique Opportunity

Advisors with clients who are 70 1/2 years old or more have a unique opportunity to help them support charitable causes and increase their retirement income, plus enjoy tax benefits with the legacy IRA. By transferring some money from their traditional IRA to a charitable gift annuity, or CGA, older clients can appreciate a steady stream of income for life while also getting qualified-charitable-distribution-related tax benefits, including possibly reduced Medicare Income-Related Monthly Adjustment Amount premium surcharges and the 3.8% investment income surtax reductions.

All this, plus the satisfaction of making a lasting impact on the nonprofit organizations they care about. Although some restrictions apply, the legacy IRA is a valuable option for those who want a beneficial solution that aligns with their financial and philanthropic goals. For advisors like me, enjoying life as a septuagenarian or older, a legacy IRA may benefit them personally as well!

Retirees May Find These Legacy IRA Benefits Attractive

There are several ways for retirees to enjoy the benefits of legacy IRAs in their overall financial planning:

• A named legacy fund. My legacy IRA puts plans in place for the Kathleen Moore Rehl Legacy Fund at the Community Foundation Tampa Bay. No need to buy an entire wing of a new building for my name to be attached to this giving fund!
• Tax advantages. The rollover distribution to a CGA is tax-free and particularly beneficial for individuals who don’t itemize their deductions. Additionally, it may help reduce Medicare surcharge premiums and the net investment income surtax, if applicable. (Of course, an outright gift to a charity provides a tax advantage, too, but without giving the donor an income.)
• Higher-income rates. The income payout rate locked-in with a CGA is generally more favorable compared with rates offered by certificates of deposit or government bonds. This stable income is secure for life.
• Retirement income now and a charitable gift in the future. The legacy IRA allows one to supplement retirement income today while supporting their favorite charitable causes in the future after death. It’s a win-win situation that, for me, aligns personal values with financial goals. It’s a good fit for donors who may need some of their IRA distributions for living expenses.
• Stable lifetime income. The administering nonprofit’s full faith and financial assets stand behind its commitment to providing income payments.
• No expense for the donor. Nonprofit organizations typically handle the administrative aspects of establishing the CGA and ensure the funds are managed efficiently and distributed to the charitable organization beneficiaries on a timely basis.

Special Considerations and Limitations of Legacy IRAs

While the legacy IRA offers compelling advantages, there are some considerations and limitations to keep in mind:

• Onetime use. The legacy IRA option can only be used once within one calendar year, and the funds must come from an individual’s traditional IRA. It does not apply to other retirement accounts, such as 403(b) or 401(k) plans. However, it may be possible to move money from one of those accounts to a traditional IRA first and then do the legacy IRA rollover with that money.
• More than one legacy IRA can be established. It’s possible to do a $20,000 legacy IRA with one charitable organization and use up to a total of another $30,000 for a second or third CGA rollover, but they all must be created in one calendar year, and no more than a total of $50,000 combined can be moved to fund any number of CGAs.
• Spousal restriction. CGA income payments can only go to a spouse.
• Deferred payments are not permitted. It’s not possible to push out income to the future. Annual payments must be paid out every year as scheduled.
• Tax implications. The annual income payments from the CGA are subject to ordinary income tax. However, the tax burden is spread out throughout one’s lifetime.
• Inflation may erode the purchasing power of future payments received.
• Some state regulations may apply. Depending on the state, some charities may be required to meet specific years of existence and/or minimum asset requirements and to provide donors with certain disclosures before allowing donors to designate them as CGA beneficiaries.
• CGA payouts tend to be lower than those of traditional annuities. The reason for this is that the primary motive is to benefit a charity rather than provide the highest possible retirement income payment.

Plant Seeds With Clients and Others About the Legacy IRA

Here are some ways for advisors to introduce the conversation about legacy IRAs with clients:

• Use social media. Position yourself as the go-to professional who can help folks with a legacy IRA. Write a story for lay audiences or do an interview highlighting the benefits and limitations of this approach. Then feature it on your website, Facebook, LinkedIn, and other sites your clients and colleagues visit.
• Make a presentation. This is a fast-growing area of philanthropy. Discuss it at your local council of the National Association of Charitable Gift Planners. This spring, I was invited to speak about “Widows, Wives, & Friends: Beyond Basic Estate Planning Plus the Legacy IRA.” (The downloadable PowerPoint presentation focuses on legacy IRAs on slides 29–33.) I’ll make a similar presentation for my local council of the National Association of Estate Planners & Councils and a group of retired financial planners later this fall. Plus, I was recently invited to make a presentation on this topic and more during a national five-part financial webinar series for women. Several other nonprofits have asked me to talk about legacy IRAs. Nonprofits welcome these presentations that inform their members and encourage charitable gifts to those organizations.
• Feature the legacy IRA in other educational activities you’re involved with. For example, I made this one-minute video with easy-to-use Animoto software, highlighting several types of planned gifts, that I’m sharing with selected individuals who are considering special charitable gifts. This piques their interest as they asked more about the stories included. It will also be part of a video trailer for a graduate course I’ll teach in 2024.
• Engage in meaningful and authentic conversations with your clients and donors. This legacy IRA option that can be a powerful part of their values-based legacy and estate planning in retirement. Indeed, I’m now assisting several people to set up their own legacy IRAs, following discussions about what matters most to them and how this program can be beneficial. These conversations typically include their financial planners, since I no longer provide comprehensive financial planning services for individuals.

My Own Legacy of Charitable Giving

In total, I’ve created or put documents in place for enabling five special giving fund plans. Here they are in the order they were created:

• Tom & Kathleen Rehl Scholarship Fund, started in 1988 from memorial gifts and appreciated stock after our daughter died and Tom’s death later.
• Moving Forward on Your Own Fund, donor-advised fund from guidebook sales and appreciated stock.
• Kathleen M. Rehl Moving Forward Endowed Fund, testamentary CRUT giving son income; funding will be from IRA.
• Charlie Pickett & Kathleen Rehl Folk Music Heritage Endowment Fund, currently funded with IRA qualified charitable distributions.
• Kathleen Moore Rehl Legacy Fund, legacy IRA to charitable gift annuity rollover; pays me income now with endowed gifts to nonprofits later.

My adult children know about what I’m doing and are supportive. Indeed, during the end-of-year holidays, each of their families identifies a charitable organization to receive a special gift in their honor from my donor-advised fund. Later this year, I’ll encourage both of my seven-year-old grandsons to be part of their family’s discussion, so they, too, can experience the joy of giving.

Kathleen Rehl, Ph.D., CFP, CEFT Emeritus, owned Rehl Financial Advisors for 18 years before retiring to an active six-year encore career, empowering widows with her speaking, writing, and research. She is the author of Moving Forward on Your Own: A Financial Guidebook for Widows. This article first appeared on the Nerd’s Eye View at Kitces.com and has been reprinted here with permission.

The views expressed here are the author’s.