It would be better if all of the $100,000 in charitable donations the children made were tax deductible in the decade after their benefactor dies (and during their peak earning years). And the possible coming 2026 deduction changes could make this possible. But even so, the children would still be required to donate in an accelerated fashion to avoid the punitive nature of the SECURE Act. And that defeats the owner’s purpose of helping the children fund their normal annual charitable gifts with pretax dollars over their entire lifetimes.
So donor-advised funds could still come into play, even if 2026 brings better tax news. If these charitable accounts are funded with IRA or 401(k) account proceeds at the owner’s passing, it will not only minimize the SECURE Act’s thorny consequences, but it will also help the children avoid income taxes completely on the funds they release to charity each year. The donor-advised fund established by the parents allows the children to make their annual charitable donations using pretax dollars, the SECURE Act notwithstanding.
If the parents opt not to establish donor-advised fund accounts for their children, there may be one other avenue available for the kids to use pretax moneys for charity. If it’s after 2025, and if either the standard deduction or the state and local income tax deduction has been restored to its previous level, the children inheritors could instead donate some IRA proceeds to donor-advised funds they establish themselves, using these funds to make their own future gifts. This possibility exists even before 2026 for a child who has a significant mortgage interest deduction (for example, more than $15,000 for a married couple filing jointly). The problem, of course, is that the children may not be forward-thinking enough to take this wise step on their own.
For example, if a parent leaves each of two children a $1 million IRA, the children could each take $100,000 of that as taxable income, even during peak tax bracket years, and then offset all or most of it with tax-deductible charitable contributions to donor-advised funds of their own. The children could then use these funds to make annual charitable donations for the rest of their lives.
Charitable planning this way not only makes sense, it takes only a phone call to the account owner’s favorite donor-advised fund to get started.
James G. Blase, CPA, JD, LLM, has more than 40 years of experience as an estate planning attorney. He practices in St. Louis.