By Vaughn W. Henry
The clock is ticking. For tax and financial advisors of donors 70 1/2 or older, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed in December allows donors to tap their Individual Retirement Account to make qualified charitable distributions through January 31, 2011.
Although it’s late in 2010, and may be logistically difficult to make those charitable distributions, there is a little wrinkle in this tax bill that allows donors an extra month to elect to have those gifts treated as qualified charitable distributions (QCD) made in 2010. Consequently, your clients have until January 31 if they would like to make a tax efficient gift to a public charity this year, and all of next year to do it again.
There are a few important rules to remember about IRA gifts and QCD.
There is a minimum age restriction of 70 1/2, and a $100,000 limit per IRA donor for charitable distributions from IRAs each year. Individuals may exclude the amount distributed directly to an eligible charity from their gross income. While there’s no income tax deduction, neither is there recognition of income; the net effect is tax efficiency.
This is especially helpful for clients who have large IRA account balances, a charitable interest, who don’t usually itemize or don’t have an AGI large enough to make use of significant charitable tax deductions, or who live in a state without a concurrent state income tax deduction for charitable gifts.
The recipient charities generally need to be public charities, however, you can’t distribute the IRA to supporting organizations or donor advised funds held at public charities. However, you may use funds that target specific interests or projects at many community foundations.
No split interest trusts (CRT, CLT), charitable gift annuities, or private non-operating foundations qualify as QCD recipients. However, in normal estate planning situations, making any of these entities (except for the charitable lead trust) a beneficiary of a retirement plan account often makes good sense.
Charities must acknowledge the charitable gift as coming from the donor’s IRA and that there were no quid pro quo expectations.
If your clients haven’t gotten around to making their Required Minimum Distributions from their IRA, the Internal Revenue Service treats distributions to charity as qualifying for those annual minimum distributions from the donor’s IRA.
The gifts are restricted to either traditional or Roth IRAs. Note that 403(b), 401(k), and other retirement accounts do not qualify.
The gift must come directly from the IRA. Do not take the distribution and endorse the check or cash it and give the proceeds to the charity. However, the IRA custodian can make the charity the payee but mail it to the donor who may then deliver it to the charity.
Charitable gifts from IRAs are very tax efficient and, in most cases, are an ideal means to make significant donations to charity.
About the author:
Vaughn W. Henry is an independent advisor to charitable organizations on planned giving. His consultancy, Henry & Associates, specializes in gifting, estate planning, and wealth conservation resources to professional advisors. Vaughn owns www.gift-estate.com, a frequently updated wealth planning resource Web site. He can be reached at [email protected], or by phone at (800) 879-2098.