Don’t forget about the SECURE Act


Everyone is talking about the CARES Act and the deep and lasting impact of the corona virus on our lives and our economy. And rightfully so! But when we get back to raising money for our organizations we need to be equally aware of the impact of the SECURE Act. We all know that older donors are likely the best candidates for large major gifts, and these individuals now have greater incentive to give from their IRA’s than ever before because of the provisions of the SECURE Act. Fundraisers need to know what has changed, and thankfully Dr. Russell James has laid it all out for us.

4 Things Fundraisers Need to Know about the SECURE Act

1.     Leaving IRAs to heirs just got more expensive, so leaving IRAs to charity just got smarter.

2.     For the same reason, making current gifts from IRAs, called QCDs, now makes even more sense.

3.     But, QCDs will now get a lot more complicated.

4.     Leaving IRAs to a Charitable Remainder Trust is a possible alternative to the new rules, but probably won’t be attractive to many donors or charities.

Let’s look at each of these in depth and how you can use them to raise more money.

1.           Leaving IRAs to heirs just got more expensive, so leaving IRAs to charity just got smarter.

What happened

The SECURE Act, passed in December of 2019, requires non-spouse heirs to take all the money out of an inherited IRA within 10 years. Before, these heirs could take it out across their entire life expectancy. When an heir takes money out of an IRA, they must pay income taxes on that money. The longer an heir can leave money in the IRA, the longer the heir can postpone paying those taxes. Also, the longer an heir can leave money in the IRA, the longer the money can grow tax free inside the IRA. 

The new rule means that heirs have to take the money out sooner. That means they pay income taxes sooner. It also means the money won’t be able to grow tax free for nearly as long. Inheriting an IRA now comes with fewer advantages and a bigger, faster tax bill. This is true for everyone, not just those with the big taxable estates over $11.4 million. These are income taxes. Even if you only inherit $100, you still have to pay them. All of these taxes go away for any part of the IRA that is left to a charity.

How to raise more money

IRA money left to an heir is taxed. Now, IRA money left to an heir is taxed much faster. IRA money left to a charity isn’t taxed at all. Most donors don’t know this. You can use the new law as an excuse to let donors know. 

“Did you know leaving IRA money to heirs just got more expensive with this new law? Yeah, the government is taxing that money a lot faster than before. If you leave just $10,000 to a child living in California the government can take more than half of it!”[1]

[If you live in a red state, pause here to allow the other person to make a snarky comment about California.]

“But, for charitable people like you, there is actually a way to avoid the tax…. Many people like to leave a gift in a will to support a cause that’s been important in their lives. But, you can list the charity on the IRA itself as a beneficiary to inherit part or all of it. Any part inherited by the charity avoids all taxes. The heirs are better off when they get money that’s not from the IRA. But, the IRA money is great for the charity, because it doesn’t pay taxes. It’s a really smart way to leave a gift.”

This raises money in two ways. First, it encourages estate gifts. 90% of substantial donors will leave no gifts to charity in their final estate plan,[2] so it is important to be intentional about motivating action. This conversation establishes such gifts as a social norm [“many people like to”[3]] that reflect the donor’s life story [“a cause that’s been important in their lives”[4]] and shows that the gifts are a way to give smarter.[5] It also uses a small dollar example ($10,000) because many donors think taxes don’t apply unless they have a large estate (e.g., over $11.4 million). But, those inheriting IRAs have to pay income taxes (not just estate taxes) and that applies regardless of the size of the estate. Also, this shows a way to make an estate gift that doesn’t require the daunting formality of drafting or updating the entire will. Finally, in unpublished experiments I have run, people become more interested in these gifts when they realize they can leave just part of the account to charity, like 10%, rather than the entire account.

Second, such gifts are more certain than a gift in a will. 62% of signed and witnessed will documents actually control no assets at death.[6] This is largely because the will document controls only those assets titled without a transfer-on-death, pay-on-death, or beneficiary designation, and without joint ownership with right of survivorship. Many donors who think they have a gift in their will to charity don’t realize that, because of their asset titling, the will actually controls nothing. Getting into a beneficiary designation avoids this problem.

2.     For the same reason, making current gifts from IRAs, called QCDs, now makes even more sense.

What happened

Leaving money to heirs from an IRA is now less beneficial and is taxed more heavily, as described above. Thus, giving directly from an IRA during life makes even more sense, since holding onto it and leaving it for the heirs isn’t such a great idea.

IRA owners age 70½ or older can make transfers directly from their IRA account to a charity, up to $100,000 per year. This is called a Qualified Charitable Distribution (QCD). For most donors, this allows them to avoid paying any taxes on this money. Rather than taking the money out and increasing their, potentially taxable, income, this direct transfer means it never shows up in their income. This is much better than receiving the income and then getting a charitable deduction for making a gift. First, most people can’t use charitable deductions anymore because the standard deduction is so high. Second, by not taking the money out of the IRA, this keeps income lower. Keeping income lower can help with other government programs, for example avoiding higher premiums for Medicare Part B and prescription drug coverage.

IRA owners age 72 or older are forced to take money out of their IRA. This is called a Required Minimum Distribution (RMD). Any QCD gift reduces the RMD. Without the QCD, the RMD makes income higher and can increase income taxes. The new law changed the age for RMDs from 70½ or older to 72 or older. But, it didn’t change the age for QCDs, which stayed at 70½ or older.

How to raise more money

If you have a donor age 72 or older, that explanation is simple.

“Why don’t you make those gifts to us directly from your IRA? If you do that, it lowers the amount the government is forcing you to take out of your IRA. That way you don’t ever have to pay taxes on it.”

If you have a donor between age 70½ and 72, they don’t yet have RMDs, so you can’t yet use that argument. Instead, you might say,

“Why don’t you make those gifts to us directly from your IRA? If you take that money out yourself, it gets taxed. But, if you make a gift directly from your IRA it avoids those taxes. A lot of people like to do this because they can’t use the charitable deduction anymore. This is a great way to still get a tax benefit from your giving.”

Making this argument is important for two reasons. First, it justifies making QCD gifts BEYOND the RMD. Even donors who make QCD gifts often don’t realize they can give more than their RMD. They can give up to $100,000 per year, regardless of the RMD. Starting these gifts before the RMD hits helps keep these concepts separate.

Second, making a QCD before age 72 gets donors to make, or consider making, these gifts BEFORE they have an RMD. This can be psychologically important. In research experiments an oft-repeated result is that people are much more charitable when giving from “windfall” money.[7] It is easier to be charitable with new, unexpected money than with regular income. Sharing a “gain” (compared to regular income) is mentally more enjoyable than taking a “loss” that reduces normal spending (compared to regular income).

The best time to encourage giving from an RMD is before the donors get used to spending the RMD. The first time they are forced to take money out of their IRA, it is “extra” money. Giving out of “extra” money is much easier. But, if donors don’t know about QCDs until after they have gotten used to taking the RMDs and spending them every year, then the QCD gift is harder because it’s more like a gift out of regular income.

The new law creates a “training window” where donors can learn to make QCD gifts starting at age 70½ before the RMDs hit at age 72. Doing an effective job of donor communications in this window sets up the opportunity for making gifts out of “extra” or “windfall” money from the RMD at age 72, before this money starts to feel like regular income. 

3.     But QCDs will get a lot more complicated.

What happened

In the new law, people of any age can make a deductible contribution to an IRA. Here is the problem. A QCD is no longer treated like a QCD until all of a person’s QCDs add up to more than all of their deductible contributions made to an IRA after age 70½. This won’t start out as being much of a problem because nobody could make these older-age contributions to an IRA before 2020. But, now that it is possible, this might gradually develop into a significant complication since about a third of people have earned income after age 70.

If a person has made a deductible contribution to their IRA after age 70½, then a QCD counts as income to them. In such as case it does give them a charitable deduction, which a QCD doesn’t normally do. But if, like most people, they can’t use the deduction, then it just increases their income. Of course, if they are using a QCD to reduce their RMD, then this increased income is going to happen either way. So, the QCD doesn’t create a penalty in that case. But, it also doesn’t create an advantage until AFTER they have burned through all of their deductible contributions made to an IRA after age 70½. Only after their total QCDs exceed their total deductible contributions made to an IRA after age 70½ will the QCD start to actually work like a normal QCD.[8] However, couples may choose to coordinate so that one of them makes QCDs while the other simultaneously makes deductible contributions to an IRA. (See my post about this strategy.)

How to raise more money

This is a disadvantage, so you can’t use it to raise more money. You just have to limit the damage. As much as possible, keep it simple. Sell the idea of a QCD first. If the donor is interested, only then check for this problem.

“The rules change a bit if you put any money into your IRA after you were 70½. Did you ever do that?”

If this happened, then make sure the donor is NOT exceeding their RMD. As long as they are still using the QCD to reduce the RMD, then this technique doesn’t create a penalty.

“So, in that case you’ll still have to pay taxes on that part of the money, either way you take it out. In other words, if you took a tax deduction for putting money into your IRA after you were 70½, then you don’t start getting the ‘extra’ benefit for the direct donation until after you’ve donated that much directly from your IRA. Until you do that, it’s treated the same as taking the money out and then donating it. You still get the tax deduction, but that’s usually not as good as avoiding the income in the first place. You can still get there. It’ll just take you a little longer before you start getting that extra benefit.”

Until the donor has burned through these post-70½ deductible IRA contributions, it’s important that they don’t make QCD gifts beyond their RMDs. The QCD counts as income and a charitable deduction, but it reduces the RMD, which also counts as income. So, there is no penalty in that case, because they’ve got to count that income either way. 

But, if they make a QCD gift greater than their RMD and they still haven’t burned through all of their post-70½ deductible IRA contributions, then the gift will actually increase their income. It’s like pulling money out of the IRA, paying taxes on that money, and then making a gift. If they can’t use the charitable deduction, this means the gift actually increases their taxes. Also, it increases their income, so it can increase other government-related expenses such as premiums for Medicare Part B and prescription drug coverage.

4.     Leaving IRAs to a Charitable Remainder Trust is a possible alternative, but probably won’t be attractive to many donors or charities.

What happened

The SECURE Act has been called the “death of the stretch.” Non-spouse heirs used to be able to stretch out when they took the money out of an IRA across their entire life expectancy. Now, they can’t. Now, they have to take all the money out of an inherited IRA within 10 years. This means they pay the income taxes earlier and get less time for the money to grow tax free inside the IRA.

One alternative is to change the beneficiary of the IRA to a Charitable Remainder Trust (CRT). The CRT can then pay to the heir for their entire lifetime (or for a fixed 20 years). No taxes are owed until the heirs receive each payment. Anything inside the CRT grows tax-free. Anything left over at the end goes to the charity. 

How to raise more money

This is tricky, because the answer is, “You probably can’t.” But, let’s look at some scenarios.

Scenario A: Donor names a CRUT that pays the heir the maximum payout for their life.

The payout rate will pay a fixed percentage of whatever is in the CRUT at the beginning of each year, so the payments can fluctuate depending on investment returns. This maximum rate will differ based on the age of the heir at the time of transfer. This is because a CRT must be projected to leave an amount to charity with a present value worth at least 10% of the initial transfer. So, for a 50-year old heir, the maximum payout would be 9.6%, for a 30-year old heir it would be 5.2%, and for an heir less than 28, no CRUT is allowed, because even the minimum 5% payout is too big.

Why the donor doesn’t want this. 

·       The first problem is that this changes the nature of the asset. Before, the heir was getting an actual chunk of money. Now, they are getting a lifetime income. That’s great, but it’s not the same thing. If the heir doesn’t outlive the donor by much, then little money stays in the family. That’s a big change to make just to maybe delay some taxes beyond 10 years. 

·       The second problem is that the heir loses payout flexibility. With an inherited IRA the heir could take out no money in a high-income / high-tax-rate year and then take out a lot in a low-income / low-tax-rate year. The heir could even plan to intentionally create a low-income / low-tax-rate year just for this purpose. With an inherited IRA, there are no payout restrictions other than anything left must come out at the end of ten years. In contrast, the CRUT payout percentage is fixed. (You can get a little flexibility with a Net Income Makeup CRUT or NIMCRUT, but this requires very creative investing or maybe using investment instruments that the IRS hasn’t approved and may dispute.)

·       The third problem is that this is a hassle. Drafting, setting up, and administering a CRUT for a lifetime is a substantial administrative burden. It’s not like just having an inherited IRA in your name you can take money out of anytime you want.

Why the charity doesn’t want this. 

·       The charity gets a share at the end, but the end is probably a really long way away. It’s after the death of the donor. Plus after that, it’s then after the death of the donor’s surviving heir. Suppose a donor names your organization at age 65. According to the IRS tables, there is a slightly greater than 50% chance they will still be alive at age 83. That’s 18 years. And when they die the clock actually starts. Suppose the heir is 50. His life expectancy is another 30 years. That’s 48 years before the charity sees a dime.

·       Actually, the end is much further away. Wealthy people live longer.[9] Wealthy charitable people live even longer than that.[10] If you are using the IRS tables to predict life expectancy of major donors, you are going to be heavily underestimating that number.

·       Actually, it’s longer still. Think about it. If you have an heir with a known health problem – like a diagnosis with cancer or heart disease – what are the chances you will convert your stack of cash into lifetime income? About zero. This reality means that heirs selected to receive this kind of gift will, on average, live longer. The “sick” people get cut out, so the averages change. This is why companies don’t use life insurance tables to estimate the life expectancy of annuity purchasers. Annuity purchasers live longer. They are actually willing to bet that they will live a long time. Sick people don’t buy annuities.

·       Oh, and the charity might not get anything. The donor can change their mind anytime. Statistics show a remarkably high level of end-of-life instability in charitable estate plans.[11] So, just because a charity is named today doesn’t mean it will still be named tomorrow. Also, the donor has to keep taking money out of the IRA for RMDs, so the account will likely get smaller. 

Scenario B: Donor names a CRAT that pays the heir the maximum payout for their life.

A CRAT pays a fixed dollar amount, rather than a fixed percentage of anything in the trust. But, it must have no more than a 5% chance of exhausting before paying out to the charity at the end. At the moment, the section 7520 rate is 2.2%. Using that rate, the lowest legal payout 5% CRAT will exhaust in 27 years. In order to have no greater than a 5% chance of living for 27 more years, the heir must be at least 71 years old at the time of transfer. In other words, if the heir is younger than 71, then you can’t set up a normal CRAT.[12] There is now a drafting workaround that pays out all assets if the CRAT falls to the amount that would have had a 10% present value at the time of the contribution.[13] But, if you do that then you still get the disadvantage of heirs living a short time, but lose the advantage of heirs living a long time.

Scenario C: Donor names a 20-year CRAT that pays out to the heirs or their descendants for a fixed 20 years.

With the fixed term CRAT, there is no risk of the heir not living a long time. So, the transfer is guaranteed as long as there are no bad investments.

Why the donor STILL doesn’t want this. 

The goal of the planning was to work around the new rule requiring that everything must be paid out to the heir, and taxed, within 10 years. Now, the heir is paid out over 20 years. That’s a win, right? Not so much. First, the 10 years is completely flexible. The payout could come on the last day of the 10 years. The 20 years is completely inflexible. A fixed amount is paid each year for 20 years. If the goal is to leave the money in the tax-free environment as long as possible, this doesn’t really help. You could have left 100% in for the full 10 years. (Actually it’s longer. Technically, it’s the end of the 10th calendar year following the calendar year of death, so that makes it between 10 and 11 years.) Now, you spread it out in equal payments across 20 years. That averages out to about the same thing. Also, with the CRAT you lose the flexibility of the 10 year payout where if you have (or can intentionally plan to have) a low-income / low-tax rate year, you take out a big chunk, or all of it, in that year.


[1] The top California income tax rate is 13.3%. The top federal rate is 37%. Because of the State and Local Tax (SALT) deduction caps, these state income taxes are, at the margin, unlikely to be deductible, creating a marginal tax rate of 50.3%. 

[2] For the formal statistics see James, R. N., III. (2009). The myth of the coming charitable estate windfall. The American Review of Public Administration, 39(6), 661-674. [If you would like a copy of all of my research articles cited in this article, just comment on this article with “send me the articles” or message me directly. I don’t have the copyright to post them publicly, but I can send individual copies directly to you.]

[3] For academic research showing the power of this approach see James, R. N., III (2016). Phrasing the charitable bequest inquiry. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 27(2), 998-1011; Also see James, R. N., III (2019). Using donor images in marketing complex charitable financial planning instruments: An experimental test with charitable gift annuities, Journal of Personal Finance. 18(1), 65-74. [If you would like a copy of all of my research articles cited in this article, just comment on this article with “send me the articles” or message me directly. I don’t have the copyright to post them publicly, but I can send individual copies directly to you.]

[4] For academic research showing the power of this approach see James, R. N., III & O’Boyle, M. W. (2014). Charitable estate planning as visualized autobiography: An fMRI study of its neural correlates. Nonprofit and Voluntary Sector Quarterly, 43(2), 355-373; Also see, James, R. N., III & Routley, C. (2016). We the living: The effects of living and deceased donor stories on charitable bequest giving intentions. International Journal of Nonprofit and Voluntary Sector Marketing, 21(2), 109-117. [If you would like a copy of all of my research articles cited in this article, just comment on this article with “send me the articles” or message me directly. I don’t have the copyright to post them publicly, but I can send individual copies directly to you.]

[5] For academic research showing the power of this phrasing see James, R. N., III (2018). Creating understanding and interest in charitable financial planning and estate planning: An experimental test of introductory phrases. Journal of Personal Finance. 17(2), 9-22. [If you would like a copy of all of my research articles cited in this article, just comment on this article with “send me the articles” or message me directly. I don’t have the copyright to post them publicly, but I can send individual copies directly to you.]

[6] James, R. N., III (2016). The new statistics of estate planning: Lifetime and post-mortem wills, trusts, and charitable planning. The Estate Planning & Community Property Law Journal, 8(1), 1-39, at 27. [If you would like a copy of all of my research articles cited in this article, just comment on this article with “send me the articles” or message me that directly. I don’t have the copyright to post them publicly, but I can send individual copies directly to you.]

[7] Arkes, H. R., Joyner, C. A., Pezzo, M. V., Nash, J. G., Siegel-Jacobs, K., & Stone, E. (1994). The psychology of windfall gains. Organizational Behavior and Human Decision Processes, 59(3), 331–347; Konow, J. (2010). Mixed feelings: Theories of and evidence on giving. Journal of Public Economics, 94(3–4), 279–297.; O’Curry, S. (1999). Consumer budgeting and mental accounting. In P. E. Earl & S. Kemp (Eds.), The Elger companion to consumer research and economic psychology. Northhampton, MA: Cheltenham.; Reinstein, D., & Riener, G. (2012). Decomposing desert and tangibility effects in a charitable giving experiment. Experimental Economics, 15(1), 229–240.

[8] For a great discussion of these new rules see: https://www.kitces.com/blog/secure-act-qualified-charitable-distributions-qcd-ira-contribution-age-repeal-70-1-2-anti-abuse-reduction/

[9] Makaroun, L. K., Brown, R. T., Diaz-Ramirez, L. G., Ahalt, C., Boscardin, W. J., Lang-Brown, S., & Lee, S. (2017). Wealth-Associated disparities in death and disability in the United States and England. JAMA internal medicine, 177(12), 1745-1753.

[10] Clontz, B. (2010) The Methuselah effect: Longevity’s impact on planned giving. The National Conference on Philanthropic Planning, 2010.

[11] James, R. N., III & Baker, C. (2015). The timing of final charitable bequest decisions. International Journal of Nonprofit and Voluntary Sector Marketing, 20, 277-283. [If you would like a copy of all of my research articles cited in this article, just comment on this article with “send me the articles” or message me directly. I don’t have the copyright to post them publicly, but I can send individual copies directly to you.]

[12] To see how to calculate this download my free book, Visual Planned Giving, at www.encouragegenerosity.com/VPG.pdf see page 249.

[13] Rev. Proc. 2016-42


Published by: Russell James, J.D., Ph.D., CFP®Professor of Charitable Financial Planning at Texas Tech UniversityPublished