Posted January 1st, 2009

Did Congress Kill IRA Rollover Gifts?

On December 23, 2008, President Bush signed into law legislation that will waive the requirement that those age 70½ or older take Minimum Required Distributions (MRDs) from IRAs and other retirements plans this year. This was done to reduce selling pressures in the markets while also relieving the burden on seniors forced to take taxable withdrawals they may not need and pay taxes that would magnify losses they may have already incurred.

With all the talk about the IRA rollover offering relief from forced withdrawals, what impact might this legislation have on charitable IRA gifts? Hopefully very little.

While it is true many seniors dislike being forced to withdraw funds that are growing tax free, is avoiding taxes on forced withdrawals the only motivation for IRA gifts to charity?

Learning from experience

Surveys of IRA rollover gifts by the Partnership for Philanthropic Planning (formerly the NCPG) show that the vast majority of such donations in 2006 and 2007 were in the form of larger gifts. Note that over 40% of IRA rollover gifts were completed in the maximum amount of $100,000. Some 74% were $25,000 or over, and 87% were $10,000 or more. (See Give & Take from November 2007 at www.sharpenet.com/gt.)

Despite e-mail blasts and direct mail to the masses, the IRA rollover in practice amounted to a welcome strategy for older donors who wished to make major current gifts while enjoying a number of tax benefits rather than just a way to bypass tax on a mandatory withdrawal.

Other motivating factors

Keep in mind that those beyond the age of 70 who can afford to make a five- or six-figure gift from retirement funds are more than likely to fall into the group of persons who still expect their heirs to experience a heavy estate tax burden at their demise. For these persons their IRA may be a relatively small portion of their total net worth even following recent market declines. They are increasingly aware that IRA and other qualified retirement plan assets will be reduced by estate taxes as well as the income tax their heirs will pay on what remains.

When considering which assets to use to fund a larger gift, it thus makes sense for some to give IRA assets rather than assets that can be transferred to heirs during lifetime and at death with less “tax attrition.”

Another consideration is the fact that capital gains experienced inside qualified retirement accounts are taxed as ordinary income when withdrawn. It can make more sense for donors to give those gains away as gifts rather than have up to 35% or more consumed by tax when withdrawn. They can realize other gains outside retirement plans at tax rates as low as 15%.

The AGI factor

Other donors appreciate the fact that directing funds to charity from an IRA is a way to deal with their inability to otherwise deduct gifts because they have reached the 50% of AGI limit.

Wealthy donors often structure their investments to reduce ordinary income and keep their taxes (and their ability to take deductions) low. Any tax exempt income they receive is also not part of their AGI, further reducing the ability of some to use charitable deductions. An IRA rollover gift allows those with these concerns to make additional gifts without having to worry about AGI limitations.

Recall the special KETRA provision in 2005. This allowed donors to deduct 100% of 2005 charitable gifts of cash, waiving the 50% of AGI limitation. Subsequent IRS statistics indicate that this provision generated many times the additional gifts Congress expected. When more donors come to realize IRA gifts represent a way to give that helps with the AGI limit problems they may face with reduced incomes from investments this year, we may see increased gift activity as a result.

In some states, there is no charitable income tax deduction on the state income tax return. Thus an IRA gift will also help some donors avoid state income taxes that would be due if gifts were made from other funds.

As a result of these and other tax planning considerations, many IRA gifts have been used to make larger gifts that are often given in fulfillment of pledges to capital campaigns. In one case, a couple in their 80s each gave $100,000 in December 2006 and $100,000 in January 2007 to complete a $400,000 campaign pledge. Keep in mind that their heirs could have received as little as $145,000 had the $400,000 been left to them.

Final analysis

Donors give because they believe in the mission and goals of your organization. What, when, and how they give can, however, be significantly influenced by tax considerations. With or without minimum withdrawal requirements, in these challenging times gifts from IRAs continue to offer a very efficient way for wealthier older donors to make gifts while maximizing their after-tax income today and preserving more of their assets for the future enjoyment of their heirs.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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