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New opportunities for generous IRA owners
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BY: PETER A. IGEL Special to the CJN
Do you have a healthy balance in your IRA? Are you required to take minimum distributions but would prefer not to? Are you generous with charities?
If you can answer “yes” to all three of these questions, Congress has a special deal for you, but this experimental rule lasts only until the end of 2007. With that deadline approaching, start the process now. Paperwork takes time — don’t wait until December!
For the rest of 2007, individuals 70? or older — the ones who must take required minimum distributions — may order their custodians to make a direct transfer (similar to a rollover) of IRA funds to certain public charities. Such transfers count against an owner’s required minimum distributions. The limit per year is $100,000 per person.
The effect of the rule is that a transfer of IRA funds directly to a charity allows a person required to take minimum distributions to bypass himself or herself for tax purposes, while allowing a favorite charity to enjoy the funds.
Why is this important? Couldn’t the owner reluctantly take the required minimum distribution, write a check to a charity, then claim a charitable deduction? Yes, but often there is a mismatch between the tax savings from a deduction and the tax on the minimum distribution.
Under this new law, the owner avoids all these issues. There is no taxable income from the minimum distribution, and there is no need to look for a charitable deduction to try to offset the income — the owner satisfies the minimum distribution rules without reporting the amount passed to charity in taxable income.
For years, people have used their IRAs to fund their charitable intentions at death. IRAs otherwise generate estate tax, and heirs who inherit the IRAs must pay income tax when they withdraw the funds. But, if an IRA passes to a charity at death, there is no estate tax on such value, and the charity may withdraw the funds without income tax.
By contrast, a lifetime transfer to a charity is generally treated as a taxable withdrawal by the IRA owner, followed by a charitable contribution. For people who cannot take full advantage of the charitable contribution deduction, the tax result is unfavorable since they face receipt of taxable income without an offsetting deduction, even though the entire proceeds pass to charity.
Many seniors in their retirement years may now fund their charitable objectives with assets that otherwise cause tax headaches. Some seniors no longer take itemized deductions or face limitations on charitable deductions, since their gross income drops during retirement. This is definitely a valuable option.
The new charitable rollover provision is effective only through Dec. 31, 2007. Congress often tests novel rules for a limited time, and if they prove popular, makes them permanent.
Most public charities qualify to receive charitable transfers under the new rule. Caution: Private foundations, “supporting organizations” of public charities, and donor-advised funds do not qualify to receive transfers from IRAs. You must discuss with any charity whether its fundraising arm, foundation or development office is classified by the IRS as a “supporting organization”; if so, you will need to work with the charity to direct the transfer elsewhere in the organization.
Many charities focus such development efforts into a subsidiary, and until recently, most subsidiaries were classified as “supporting organizations.” Several subsidiaries are now seeking re-classification as a different type of public charity, and thus may receive transfers from IRAs. Your favorite charities should be able to confirm their tax status for you.
Peter A. Igel is an attorney with the Estate and Succession Planning group at the Cleveland-based law firm of Calfee, Halter & Griswold LLP.
If you can answer “yes” to all three of these questions, Congress has a special deal for you, but this experimental rule lasts only until the end of 2007. With that deadline approaching, start the process now. Paperwork takes time — don’t wait until December!
For the rest of 2007, individuals 70? or older — the ones who must take required minimum distributions — may order their custodians to make a direct transfer (similar to a rollover) of IRA funds to certain public charities. Such transfers count against an owner’s required minimum distributions. The limit per year is $100,000 per person.
The effect of the rule is that a transfer of IRA funds directly to a charity allows a person required to take minimum distributions to bypass himself or herself for tax purposes, while allowing a favorite charity to enjoy the funds.
Why is this important? Couldn’t the owner reluctantly take the required minimum distribution, write a check to a charity, then claim a charitable deduction? Yes, but often there is a mismatch between the tax savings from a deduction and the tax on the minimum distribution.
Under this new law, the owner avoids all these issues. There is no taxable income from the minimum distribution, and there is no need to look for a charitable deduction to try to offset the income — the owner satisfies the minimum distribution rules without reporting the amount passed to charity in taxable income.
For years, people have used their IRAs to fund their charitable intentions at death. IRAs otherwise generate estate tax, and heirs who inherit the IRAs must pay income tax when they withdraw the funds. But, if an IRA passes to a charity at death, there is no estate tax on such value, and the charity may withdraw the funds without income tax.
By contrast, a lifetime transfer to a charity is generally treated as a taxable withdrawal by the IRA owner, followed by a charitable contribution. For people who cannot take full advantage of the charitable contribution deduction, the tax result is unfavorable since they face receipt of taxable income without an offsetting deduction, even though the entire proceeds pass to charity.
Many seniors in their retirement years may now fund their charitable objectives with assets that otherwise cause tax headaches. Some seniors no longer take itemized deductions or face limitations on charitable deductions, since their gross income drops during retirement. This is definitely a valuable option.
The new charitable rollover provision is effective only through Dec. 31, 2007. Congress often tests novel rules for a limited time, and if they prove popular, makes them permanent.
Most public charities qualify to receive charitable transfers under the new rule. Caution: Private foundations, “supporting organizations” of public charities, and donor-advised funds do not qualify to receive transfers from IRAs. You must discuss with any charity whether its fundraising arm, foundation or development office is classified by the IRS as a “supporting organization”; if so, you will need to work with the charity to direct the transfer elsewhere in the organization.
Many charities focus such development efforts into a subsidiary, and until recently, most subsidiaries were classified as “supporting organizations.” Several subsidiaries are now seeking re-classification as a different type of public charity, and thus may receive transfers from IRAs. Your favorite charities should be able to confirm their tax status for you.
Peter A. Igel is an attorney with the Estate and Succession Planning group at the Cleveland-based law firm of Calfee, Halter & Griswold LLP.
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