Charitable Gifts from IRA Accounts

San Antonio Express-News November 7, 2006 Charitable Gifts from IRA Accounts copyright 2006, Paul Premack
Dear Mr. Premack: I am heavily invested in securities that have performed better recently than they have in a long time. Much of the value is in my retirement IRA, and my wife passed away last year so I don’t worry about the funds being available for her support. I do have two kids, but they are married adults with strong financial portfolios of their own. I’ve considered making some substantial gifts to charities I support, but don’t want to pay income taxes for taking money out of my IRA. Is there a trust or other legal arrangement I can use to help these charities but avoid extra taxes? – G.D. Anyone age 59 ½ or older can take money from their IRA without paying a penalty, but withdrawals are counted as taxable income. Seniors age 70 ½ or older are required to make minimum annual withdrawals and to pay taxes on the withdrawals. The money that was deposited to the IRA was tax-free, and the growth through the years has been tax-free, so eventually paying up seems inevitable. Compare that to funds in regular investments (outside an IRA), on which you will have paid taxes when earned. If you give away some of those regular funds to charity, you get a deduction that helps reduce your income tax for the year. Historically, giving from regular funds reduced taxes, giving from IRA funds increased taxes. Then Congress passed the Pension Protection Act of 2006. Part of that law included a short-term window for making gifts from your IRA without increasing your income taxes. Here are the rules imposed by the new law:  The IRA owner must be 70 ½ or older. Anyone younger cannot use this tax break;  One or more gifts may be made from IRA funds, but there is an annual limit of $100,000.  Any gift must go directly from the IRA custodian to the charity. You cannot withdraw the funds to your own account to disburse them;  The window closes on December 31, 2007. You can use this break if you act before December 31, 2006 ends. You can use it again in 2007, but not thereafter. Even though a charitable distribution from your IRA under this law no longer inflates your income tax bill, the distribution won’t reduce your income tax bill, either. You are not allowed to deduct a charitable gift when the funds come from your IRA as you can when the funds come from regular after-tax assets. Further, the IRA gift must be made outright, with no retained interest in the property. Contrast a giving tool called a charitable remainder trust (CRT): you may take after-tax assets, place them into a CRT and receive the interest earned on those funds until you die. You get a charitable deduction and a reduction in the size of your taxable estate, and the charity gets the funds only after you die. Under the 2006 law, you cannot fund a CRT with tax-free IRA funds. They can only be given directly to charity, in a no-strings-attached manner. Still, gifting from your IRA in this fashion removes the value from your taxable estate (which may reduce federal estate taxes). It cuts down on funds on which you would have eventually paid income taxes. It helps fulfill your obligation to make annual withdrawals from your IRA without increasing your income tax bill. It also allows you the pleasure of seeing your funds used to support one or more charities you favor.
Prior Week: Size of Estate when Pondering Trust Next Week: The "Marital Deduction" in Estate Tax
Disclaimer: This column answers a specific legal question asked by an individual in Texas. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice, as it may not meet your individual needs. It may give you a solid basis for discussion with your own attorney. You should consult with your personal attorney before you take any action on this or any legal issue. Also, please be aware that laws change, so this column is valid only as of the date it was published. This communication does not create an attorney-client relationship between the author and the reader.