ICG Dollars & Sense

Dollars & Sense is a monthly series started over a year ago. Please email your questions...and be certain to look regularly for Dollars & Sense.

Dollars & Sense

A Great Opportunity for Donors ?

Question:
We’ve received a number of inquiries regarding the regulations for
gifts from IRAs. We asked our resident guru, Seven Mourning, to give us the full information on these.

His response is quite comprehensive but if you still have further
questions, e-mail us. We’ll get right back to you

Answer:
On August 17, 2006 President Bush signed the Pension Protection
Act of 2006 into law. It provides what some believe could be an additional one billion dollars in charitable gifts from IRAs. The law enables tax-free distributions from IRAs owned by persons 70½ years old on the date of the gift. It allows up to a maximum of $100,000 per year in 2006 and 2007.

Any tax incentive that encourages giving is a good thing for charitable organizations. But why is this a gift to donors?

IRAs are today’s fastest growing retirement income plans. Their owners have two important tax concerns: after age 70½, the owner must take mandatory income distributions which are taxable and for many, add significantly to the income tax due for the year; and, at death, an IRA can be the most heavily taxed asset passed to heirs. A well managed IRA can outgrow the mandatory income distributions creating a huge tax bill, in the future.

This year and next, donors can avoid an increased tax bill by having their IRA custodian send as much as $100,000 directly from the IRA to one or more charities. This distribution can be counted against the mandatory distribution requirement.

The gift will not increase the IRA owner’s income. Because the money was never received as income, the transfer is not a deductible charitable gift.

It is a very convenient way to make that major gift of $100,000 (twice!). And, since it reduces the size of the IRA, it will later save in death taxes.

In addition, there are other special rules and opportunities for this type of gift:

A donor may not use a transfer from an IRA to create any life-income type of planned gift (gift annuity or CRT) or a Donor Advised Fund, Supporting Organization, or Private Foundation.
The gift can be restricted so long as the donor has no post-gift involvement in its use. The gift may be used to pay an existing pledge by the donor.
It is important to note that the donor may not receive gift substantiation that would support the donor claiming an income tax deduction for the gift. Gift substantiation is sent to the IRA custodian, but donors can be thanked for directing the gift from their IRA.
The normal “ceilings” on income tax deductions for gifts (e.g., 50% of AGI for cash gifts) do not apply to IRA gifts which could accelerate giving, particularly pledge payments.
Gifts under this new law may be made only from traditional IRAs and Roth IRAs, not from other types of retirement accounts (e.g., Keough plans or 401(k) plans)

The process for a donor to “order” and IRA gift is simple. They should contact their IRA custodian (usually a bank or financial services firm) and learn about any special requirements or limits the custodian will have for these distributions.

Next, the donors decide to whom and how much they will give. Generally, that can be accomplished using a form provided by the custodian or by sending a letter authorizing and directing the distribution directly to your charity. The custodian should be directed to make distributions for 2006 prior to December 31, to assure that the donors can make additional gifts in 2007, if that is desired.

We have a few tips for those of you who want to promote these gifts among your donors and possible donors;

Ask your donors to contact you when they order a transfer from their IRA custodian to your charity so you can anticipate and tract its arrival.
Some custodians will want to wire transfer the gift to your financial services provider, offer to provide that information to donors when that is the case and have it ready to mail or email, right away.
While that transfer applies to their minimum mandatory distribution, donors many order a gift bigger than that up to $100,000 per year in 2006 and 2007.
In preliminary discussions with donors who might make these gifts, the most often expressed objection to IRA gifts is that they may not be convenient because they are difference from “normal” distributions... offer to help your donors make these gifts by asking who their custodian is and if you secure the forms and help donors complete them.
We suggest you recognize IRA gifts in special ways to encourage more of them in 2007.

We’ve also been asked for suggestions about how to ask for these gifts. Remember that only persons 70½ or older at the date of the gift (not just in the year of the gift) who own IRAs can make these gifts. We believe it is wise to concentrate on asking donors who can make IRA gifts to do so. Focusing your appeals is important.

There are several firms offering very good materials that you can use to tell your more senior donors and possible donors about this opportunity. Many of these firms can be found in your professional society’s directory in listings of planned giving vendors.

If you find other charities in your market are using published materials and you want to distinguish your organization, here is an alternative to consider: a letter. Writing a letter to tell your senior donors about this opportunity, using a “fundraising letter style” with examples and a focus on the benefits of IRA gifts could make yours the distinctive piece. And the most read.

Another letter to consider is one to people with pledges outstanding who might make payments from this IRAs. Even if you don’t find anyone accelerating their pledge payments, it’s a great service for your donors.

Sample Letter