Planning Ahead: Tracking Changes That May Impact Your Giving in 2024 and Beyond

With the start of the new year, it’s important to keep an eye on how upcoming tax law changes and rising interest rates may impact your future giving. Now is the time to connect with your professional advisors and The Chicago Community Trust to think about longer term planning and how to give smarter in 2024 and beyond.

The Tax Cuts and Jobs Act of 2017 – A Refresher on Gift and Estate Taxes

Signed into law in 2017, the Tax Cuts and Job Act (TCJA) was the largest overhaul to the federal tax regime since 1986. It touched various aspect of the tax code, including an increase in the threshold for when gifts made to individuals during life or at death are subject to federal transfer taxes. For 2023, an individual can make gifts to individuals during life or at death up to $12.92 million (or $25.84 million per married couple) before the gifts are subject to federal transfer taxes. For 2024, an individual can make gifts to individuals during life or at death up to $13.961 million (or $27.22 million per married couple) before the gifts are subject to federal transfer taxes.

If Congress does not act before the end of 2025, the threshold for gift and estate taxes will drop back to the levels prior to the enactment of TCJA, indexed for inflation, estimated at $6.2 million per individual and $12.4 million per married couple.

Impact on Charitable Giving

You may be asking yourself, if TCJA impacts the taxation of gifts to individuals, how does it connect to charitable giving? Simply, many charitable individuals utilize formulas in their estate plans for making charitable gifts at death. Formula clauses give an amount to family or friends up to whatever the applicable lifetime exemption from federal gift and estate taxes is at the time of the decedent’s death, with any excess going to charity.

If the lifetime exemption amount reverts to pre-TCJA levels in 2026, individuals who have formula clauses for charitable giving in their estate plans should consult with their attorney to see if the plan still aligns with intended goals.

Increased Interest in Charitable Remainder Trusts and Charitable Gift Annuities

Now may be an ideal time to consider charitable remainder trusts and charitable gift annuities. These vehicles are wonderful solutions for individuals who wish to provide themselves or loved ones with income for a time, with whatever is left going to their favorite charity. Gift annuities provide income for life, even when the first payment is deferred, and remainder trusts provide income for either life, a term of years, or both.

Rising interest rates mean that donors who create a remainder trust in early 2024 will likely be eligible for a higher charitable deduction than in previous years. To calculate the deduction on a remainder trust, the IRS requires us to use a certain rate of return. As that rate increases, it reduces the projected value of the income payments while increasing the projected gift to charity.

In January, the rate is 5.2% – a 0.6% increase compared to January 2023. However, instead of using the rate of the month when funding occurs, a donor can elect to use the rate of the two preceding months. So, for remainder trusts created on or before February 28, 2024, a donor could use the 5.8% rate from December 2023. That’s a 1.2% increase compared to February 2023.

For gift annuities, payout rates are the draw for many donors and their advisors. Most charities issue gift annuities using the maximum rates recommended by the American Council on Gift Annuities. Under the current payout rates, a donor aged 79 (the average age of person who makes this type of gift) could expect a payout rate of 7.8%. Given that December rates on a five-year CD hovered around 5%, this almost 3% increase in payouts may indicate that now is the time for charitably inclined individuals to create a gift annuity.

In addition, gift annuities are terrific solutions for donors who prefer:

• to receive tax-free income for a period of time;
• the simplicity of a contract over a trust and its administrative burdens;
• to use certain types of assets, such as S-corp stock or debt-financed real estate; 
• to have a certain portion of the capital gains tax eliminated, in general, when funded with appreciated assets.

Below is a chart summarizing some of the key differences between gift annuities and remainder trusts. Keep in mind that there are important tax and administration differences to discuss before creating them. Accordingly, it’s best to ensure there is sufficient time to complete these gifts, particularly when there’s a deadline such as year-end or the sale of a business.