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Testamentary Charitable Gift Annuity

Estate planning is critical for all adults. Much of the time, creating an estate plan is quite easy and straightforward, and other times it can be more complicated. My policy is to keep things as simple as possible – don’t complicate a process when it can be accomplished simply.

In light of that philosophy, I’m introducing an estate-planning option that seems very complicated. In fact, the name itself conveys confusion.

This month’s blog is titled “Testamentary Charitable Gift Annuities.” Wow – that sounds confusing!

Let’s break that down and explain it in simple terms. The word “testamentary” simply refers to something that is given or appointed by a will. You often hear the phrase, “last will and testament.”

The term “Charitable Gift Annuity” (or CGA) is best described as a charitable donation that pays you or a loved one for a period of time before the remainder is given to charity. I often call these life-income gifts.

The process is easily described as four steps:

  • You create the special CGA in your will

  • At death, the CGA is funded with the remaining assets in your IRA

  • Payments are then made to one or more designated heirs for life or a set number of years

  • At the end of that time, any money left in the CGA is given to your chosen charity

That is an explanation, but what is the reason for creating a testamentary CGA?

A major reason is due to the SECURE Act, which changed the option of stretching out an inherited IRA.

In the past, a person could name a child as beneficiary of an IRA, and that child could spread out the payments from that IRA over many years or even a lifetime. In fact, that child could name their own beneficiary(ies) to carry on that investment for even more years. The SECURE Act ended that opportunity and heirs are now required to take the full amount of the inherited IRA within ten years. This could add unwanted taxable income for the loved one.

The Testamentary CGA provides an option that is similar to the previous stretch IRA option, because the heir can take money from the account over a longer period of time. There is also the added benefit of tax benefits and a gift to charity.

This truly is a unique option, and the WELS Foundation is a resource to help people work through the process.

If this sounds interesting to you, I strongly encourage you to talk with a financial professional who knows your personal situation and also understands the charitable component of this type of planning.

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