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Saturday July 23, 2016

Article of the Month


The Federal Reserve reports there are over $4 trillion in IRAs and $15 trillion in qualified plans. IRA owners have the ability to make billions in new annual charitable gifts from these retirement accounts.

Charities have long hoped Congress would open the door to both current and life-income gifts from IRAs. The PATH Act in December 2015 made permanent the option for IRA owners over 70½ to make current gifts of up to $100,000 per year.

The second type of gift - IRA transfers to life income plans - is available in the LEGACY IRA Act of 2016 (H.R. 5171). This bill enables IRA owners over age 65 to transfer up to $400,000 per year from their IRA to a life income plan. The available plans include charitable gift annuities, unitrusts and annuity trusts. These plans may benefit the IRA owner or the IRA owner and spouse.

The LEGACY IRA Act was introduced on May 6, 2016 by House Ways and Means Committee members Peter Roskam (R-IL), Earl Blumenauer (D-OR), Erik Paulsen (R-MN) and Pat Tiberi (R-OH). Kevin Cramer (R-ND) is also a lead co-sponsor. Because the Joint Committee on Taxation estimates the cost for the bill to be about $30 million per year (a very modest amount for the federal government), there is a reasonably good prospect for passage of this bill in 2016 or 2017.

Qualified Charitable Distribution

The LEGACY IRA Act permits life income rollovers for individuals over age 65 and current IRA rollover gifts after age 70½. The $400,000 amount is the total for both types of IRA gifts.

LEGACY IRA Act Example A: John Donor is age 69. He rolls over $20,000 from his IRA to a charitable gift annuity with State College. Because John is age 69, he receives a fixed annuity of 5%, or $1,000 each year, from the $20,000 charitable gift annuity.

LEGACY IRA Act Example B: Mary Jones is age 72 and may use both a current and life-income IRA rollover this year. She makes a current gift from her IRA of $40,000 to Mercy Hospital. She also transfers $360,000 to a charitable remainder annuity trust. The annuity trust has a 5% annuity amount of $18,000 per year for her lifetime. Her total transfer is $400,000 as permitted by Sec. 408(d)(3)(B)*. Mary receives no income tax deduction, but because the $400,000 amount exceeds her required minimum distribution (RMD), she takes no other payouts from her IRA. This reduces her income and taxes for this year.

Charitable Gift Annuity

A charitable gift annuity is defined in Sec. 501(m)(5). It permits fixed payments for one or two lives. The American Council on Gift Annuities (ACGA) target for the residuum is 50% of the initial contribution. However, many charitable gift annuities will have a residuum of 60% to 75% of the initial amount.

The LEGACY IRA Act permits IRA rollovers to a one or two life charitable gift annuity. The annuity may pay to the IRA owner or to the IRA owner and spouse.

There is a minimum 5% payout requirement for IRA-funded gift annuities. If a charitable organization follows the ACGA rates, the one life gift annuity will be available for those age 69 or older (the age may change in the future if the AGCA rates schedule changes).

However, ACGA surveys show the initial charitable gift annuity is usually funded at age 75 or older. The primary market for the IRA to gift annuity rollover is likely to be age 75 to age 80.

Because not all ages may qualify for gift annuities in some states, it will be appropriate with both printed and electronic offers of IRA rollover charitable gift annuities to disclose that the plan may not be available for some ages. This is a common and accepted practice for both charities and insurance companies who often disclose that a plan may not be available in certain states.

Because a goal of the LEGACY IRA Act is to maintain current income tax revenue, all distributions from an IRA-funded gift annuity are ordinary income. Sec. 408(d)(8)(G)(ii). For the same reason, a deferred payment gift annuity is not an option under the LEGACY IRA Act.

Unitrust or Annuity Trust

The LEGACY IRA Act also permits persons age 65 and above to transfer up to $400,000 each year to a remainder annuity trust or charitable unitrust. The plan must be funded only with a qualified charitable distribution (QCD). A unitrust may receive multiple contributions, but all gifts must be QCDs.

Both trusts immediately commence payment of income. Therefore, the unitrust uses a standard payout method period. As is true with the gift annuity, the unitrust and the annuity trust may be for the life of the IRA owner and spouse. Sec. 408(d)(8)(D)(ii)(I).

In addition, the life income gifts are not assignable. Sec. 408(d)(8)(D)(ii)(II). This provision is needed to preclude a donor from transferring $400,000 to a life income agreement and then assigning the trust to charity the next year. Because this would convert the current gift option into a $400,000 limit, the life income plans are not assignable.

Charitable Beneficiary

A QCD may be made to a Sec. 170(b)(1)(A) organization. This section includes public charities and conduit foundations. Individuals are not permitted to make a QCD to a Sec. 509(a)(3) supporting organization or a Sec. 4966(d)(2) donor advised fund. Sec. 408(d)(8)(E).

Required Minimum Distribution (RMD)

After age 70½ an IRA owner must take an annual RMD. The required distribution starts at approximately 3.8% and increases each year. Fortunately, both the current and the life income QCD will fulfill the RMD.

LEGACY IRA Act Example C: Joe Donor is age 75 with a $1,000,000 IRA. His required minimum distribution is $43,668.12. Joe funds a $10,000 outright QCD to Favorite Charity. He also directs his IRA custodian to transfer a $33,668.12 QCD to Favorite Charity for a one life gift annuity. His total QCD of $43,668.12 fulfills the age 75 RMD.

Joint Committee on Taxation (JCT)

Before a bill is passed in the House Ways and Means Committee, the JCT "scores" or estimates the approximate cost for the bill. Fortunately, the LEGACY IRA Act was scored by JCT and the result was very favorable. The approximate cost per year will be $30 million for the initial four years. This is a very modest amount in Washington terms. The potential charitable benefits from IRA rollovers to life income plans are far in excess of the modest cost of the bill each year.

The Charitable IRA Initiative

The LEGACY IRA Act is facilitated by a coalition of leaders who formed The Charitable IRA Initiative. The Charitable IRA Initiative is a Sec. 501(c)(4) organization dedicated to passing a life income IRA charitable rollover. Charitable IRA Initiative officers include President Lindsay Lapole. Lindsay is also the Chair of the American Council on Gift Annuities and formerly was the highly successful gift planning leader for the Southern Territory of the Salvation Army. The Vice President is Michael Kenyon, the President of the Partnership for Philanthropic Planning. The Treasurer is Sr. Georgette Lemuth. She is the Executive Director of the National Catholic Development Conference. The Secretary is experienced major gifts officer John Pierce of Concordia University in Moorhead, MN. Other board members include Jim Soft of Billings, MT, Lon Dufek of Portland, OR, Marc Littlecott of Brookings, SD, Frank Minton of Seattle, WA and Charles Schultz of Camarillo, CA.

Conrad Teitell serves as Volunteer Counsel for both the Charitable IRA Initiative and the American Council on Gift Annuities. All board members are volunteers who hope to increase charitable support of nonprofits through IRA gifts to life income plans. During the many Charitable IRA meetings with both Senators and Representatives, they all appreciated the broad base of nonprofits represented by The Charitable IRA Initiative.


With strong support from all charitable organizations, the LEGACY IRA Act will be enacted in 2016 or 2017. Completing the IRA Charitable Rollover gifts by adding life income plans enables thousands of middle class Americans to enjoy both good retirement income and the satisfaction of helping the homeless, the hungry, the sick and all those in need.

*The Internal Revenue Code citations in this article are based upon the proposed LEGACY IRA Act provisions.

Published July 1, 2016
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The Benefits of Charitable Lead Trusts: Part II

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