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by John W. Jensen
On December 23, 2008, President
Bush signed into law legislation
that will waive the requirement
that those age 70˝ 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.
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