Potential Donors Should Prep for Year-End Giving

The 2006 Pension Protection Act included an IRA charitable rollover provision which permits people age 70 and-a-half and older to make up to $100,000 worth of charitable gifts directly from an Individual Retirement Account through December 31, 2007. The donor benefits by not having to report the IRA distribution as income, though the donor will not be able to claim a charitable income tax deduction for the gift. For many people, the exclusion of the IRA distribution from income is a greater tax benefit than a charitable tax deduction.

Donors can choose the charities they care about and can see the money put to work immediately to support their favorite causes. This is a win-win proposition; a way for donors to help themselves while they help the community. Many donors can increase their charitable giving, instead of leaving IRA dollars to face estate and income taxes after their death.

With the deadline for use of this provision fast-approaching, it may be helpful to quickly review who wins with this rollover provision:

• Donors who do not itemize their deductions. Perhaps the biggest winners under this new law are IRA owners age 70 and-a-half who do not itemize (i.e. take the standard deduction). In prior years, these folks had to report the entire IRA distribution as taxable income with no offsetting charitable tax deduction.
• Donors who lose tax deductions as their adjusted gross income increases. After a certain point, as taxable income increases, deductions for charitable contributions decrease with the result that one dollar of taxable income from an IRA is not fully offset by its contribution to charity. Reducing income by using IRAs for direct charitable gifts can maximize tax savings.

Donors who are subject to the 50 percent annual charitable deduction. A donor who makes a charitable gift from his/her IRA can do so without impacting the charitable deduction limit of 50 percent of Adjusted Gross Income in a single year.

• Wealthy individuals who want to reduce the size of retirement assets in their estates.
• Donors who live in states with state income tax that provides no breaks for charitable gifts.

One way a direct gift from an IRA to charity works especially well is for donors to identify those charities receiving their most generous annual gifts (i.e. Northwest Arkansas Community Foundation, alma maters, favorite charities, churches and temples). Donors can then either instruct their IRA administrator to direct a gift to those charities, or use this as a tool to jumpstart a family charitable fund, which can support the charities in perpetuity. The new IRA rollover provision allows individuals to use IRA assets to seed a designated fund or a field of interest fund. Donor advised funds, though, are not eligible for the charitable IRA exclusion. Remember that this legislation expires December 31st.

As a part of a client’s overall financial and estate planning, it is a good idea to review your charitable giving plan annually. You should put as much thought and effort into charitable giving as you would your investment portfolio. Charitably inclined individuals who want their giving to reflect their values can draw on a wide range of creative strategies to make a difference in their communities, and asking key questions can help them be more strategic in their giving.

Philanthropy should accomplish the goals of the donor. Consider the following questions:

• What did you seek to achieve with your donation, and over what period of time?
• Did your gifts properly reflect your intentions, values and beliefs? In other words, were they spent as you intended or requested-and if not, were you informed?
• Where your donations consistent with your overall financial plan?

Reflecting on philanthropy also enables donors to re-examine their goals and priorities in light of their changing financial circumstances.

Annual reviews can also provide a great opportunity to share philanthropic values with children. Many clients structure their year-end thinking about philanthropy around their kids, enabling them to think about important causes during a time when many children get swept up in the highly commercial nature of the holiday season.

Done properly and thoroughly, conducting annual reviews of your charitable giving at year’s end can help rekindle the kind of excitement that first inspired your philanthropy. 

(Jack Butt, is an estate planning lawyer and managing partner of Davis Wright Clark Butt & Carithers PLC in Fayetteville. He may be reached at 479-521-7600.)