Talk to older clients about the tax benefits of qualified charitable distributions

Let’s say you want to donate $100,000 to charity. Would you rather give that amount directly to the organization or withdraw $100,000, pay $40,000 in taxes and have only $60,000 of your contribution left to donate?

Obviously, you’d choose to avoid taxes and give the full amount, especially if that approach brought additional tax benefits with it. William M. Upson, ChFC, CLU, a 23-year MDRT member and MDRT Foundation board of trustees member from Walnut Creek, California, said this is why advisors should make sure clients older than 70.5 understand the value of qualified charitable distributions (QCD).

How it works

Beginning at that age, they’ll have to make withdrawals from their retirement account — the required percentage is the same for everyone based on their age, increasing as people get older — and every year, up to $100,000 can be allocated as a QCD, transferring funds directly from the retirement account to the charity, which has to be a 501(c)(3).

Not only does this money count toward your required minimum distribution (RMD), but the donation is made tax-free, and the funds don’t count toward your total taxable income.

(Note: This only applies to U.S.-based advisors and clients, or those working in the country who pay U.S. taxes.)

Left unchecked

Upson, whose 36-year career primarily has involved income- and estate-tax planning, noted that QCDs only became a permanent rule at the end of 2016, so recently that in 2017 1099 forms were not updated to contain a check box to indicate that form of contribution. Certainly most clients are aware of the RMD — if they don’t take out the necessary funds, there is a 50 percent penalty each year, plus taxes and interest that totals close to 100 percent of the money not taken out, Upson said — but many may not know about QCDs. It’s important for clients to talk to a CPA as well, he added, especially if this contribution has been made.

Along with the charitable benefits, QCDs provide an opportunity for advisors to serve as highly qualified experts and help clients with tax planning. This, of course, does not only apply to high-net-worth clients; for anyone who is inclined to give, a QCD allows them to give 100 cents on the dollar while also reducing tax-eligible income. The more you donate up to $100,000, the more you cut your income taxes.

It’s a win-win that doesn’t happen if someone withdraws money to satisfy the RMD and then donates to charity. “I’ve had clients who are not charitably inclined,” Upson said, “but boy, they hate to pay taxes.”

• See how MDRT members contribute to communities around the world through the MDRT Foundation.
• Watch MDRT Past President Adelia C. Chung, CLU, ChFC, discuss the MDRT Foundation’s service projects
• Listen to members talk about working on a home rebuild during the 2015 Annual Meeting Foundation project

Written by Matt Pais, MDRT Content Specialist