Planned Charitable Giving and Your IRA
Your Estate Plan
Ideas You Can Really Use
By Earl H. Cohen, Attorney at Law
November 2006
Welcome to Your Estate Plan, Ideas You Can Really Use, a monthly series of articles on estate planning, business succession, asset protection and planned charitable giving. Regardless of your age or the size of your estate this series of articles will present practical information and ideas you can really use in planning and keeping your estate plan up to date. Topics will include Estate Planning Techniques, Proper Use of Beneficiary Designations, Asset Protection Planning Techniques and Living Trusts.
As January approaches it’s once again time for year end tax planning. Congress has given us a new planning opportunity for charitable gifts made from IRAs as part of The Pension Protection Act of 2006 (PPA) but this planning opportunity is only available for gifts made in 2006 and 2007.
As a matter of background, the general rule is that distributions from an IRA must be made to the owner (or, on death, to beneficiaries who succeed to the ownership of the IRA). For 2006 and 2007, however, the PPA permits the owner of an IRA who has attained age 70 1/2 to direct that up to $100,000 each year be distributed from one or more of his IRAs directly to charity. The direct distribution to charity is not included in the taxpayer's gross income, and the PPA denies the taxpayer a charitable deduction with respect to the distribution.
The congressional staff report nonetheless indicates that a qualified charitable distribution is taken into account for purposes of the minimum distribution rules. Failure to take the minimum required distributions will subject the taxpayer to penalties. Thus, by making a qualified charitable distribution, the taxpayer can offset or eliminate entirely what needs to be distributed to avoid the penalties, AND avoid income tax on the amount distributed. This 2006/2007 distribution option does not apply to distributions to a private foundation, a supporting organization or a donor-advised fund.
The distribution-to-charity option may be of interest to taxpayers who do not personally need the IRA distribution or who face limitations on the amount deductible (e.g., a partial or total disallowance of charitable deductions as a result of phase out of their deductions or state or local tax systems that do not permit the full benefit of a charitable contribution deduction). If the IRA owner does not face any such limitations or disallowance, he may be better off taking the distribution into income and contributing either the assets distributed or assets (such as long-term capital gain property) to charity in lieu of a direct distribution from the IRA to charity. The taxpayer will avoid the possibility of having to pay ordinary income or capital gains tax on the property contributed and could repurchase similar or identical property with the cash received from the IRA, thereby effecting a tax-free basis step-up.
As with most planning strategies, it is wise to consult with your professional advisor before taking any steps involving a direct charitable distribution from an IRA or qualified retirement plan. As suggested above, for smaller contributions it may be more beneficial for the taxpayer to recognize the income and claim the offsetting charitable deduction. For further information on how this strategy may fit into your charitable planned giving strategy, feel free to call me at 612.339.4295.
