Proposal would remove the annual limit of $100,000 on IRA rollover donations.
Financial advisors who have lamented the two-year limit on the IRA charity rollover provision of the Pension Protection Act of 2006 may get their wish of seeing the law made permanent. Legislation has been introduced in Congress as a stand-alone bill that would make the rollover provision permanent, remove the $100,000 annual limit on donations, allow a broader range of charities to receive donations and provide IRA owners with planned giving options-payments to charitable remainder trusts, pooled income funds and charitable gift annuities-starting when they are age 59 1/2.
In introducing the proposal, legislators stated that since the provision went into effect in August 2006, taxpayers have used the IRA rollover to donate more than $50 million to various charities. Under current law, the provision is due to expire at the end of 2007.
"The 'Public Good IRA Rollover Act' is a simple piece of legislation that gives older Americans a straightforward way to give something back to society while providing much needed funding for churches, hospitals, museums, schools and social service organizations in our communities," Reps. Earl Pomeroy, D-N.D., and Wally Herger, R-Calif., wrote in a letter soliciting colleagues to cosponsor the legislation.
The current law allows IRA owners aged 70 1/2 or older to make charitable IRA rollovers of up to $100,000 per year directly to the charity of their choice. The legislation to extend the provision came after President Bush called for the extension of the rollover provision in his proposed fiscal year 2008 budget.
Financial advisors, meanwhile, have been hoping for an extension of the provision-which they say will enable them to use it for the benefit of more clients. "I would be a fan of having it extended," says Neil Brown of Burkett Financial Services LLC in West Columbia, S.C. "Using whatever advantages in the tax law we can manipulate fairly is what we get paid to do."
Brown has been able to use the charity rollover provision as a tool for increasing the tax efficiency of some of his clients' estates. In one case, he is using the provision for a client who turns 70 1/2 in September and who already had pre-existing plans to make charitable contributions to several schools. The provision has allowed the client to fulfill those goals and at the same time reduce his taxable income, Brown says.
The client will take advantage of the full $100,000 charity rollover he is eligible for this year, which will reduce the size of his $600,000 IRA account and thereby reduce his income tax exposure. The client's total net worth is about $28 million when his brokerage accounts and other assets are included.
"My goal is to really leave him with more tax efficiency," Brown says. He wishes, however, that the strategy were available to most of his other clients. At the moment, it is not. Brown says many of the clients who could take advantage of the rollover are currently under the age of 70 1/2, and ineligible for the rollovers.
Advisors say they're not surprised that the rollovers have been popular. Unlike most tax strategies, this one is easy to understand and simple to implement, while at the same time providing significant flexibility. "It's a tax law that doesn't have unintended consequences," says Mark Joseph, president of Sentinel Wealth Management in Reston, Va. "As far as I can tell, it's very simple and taxpayer-friendly without any hidden traps."
Some advisors note that the rollover provision does not allow donations to donor-advised funds, which has forced some clients to change their giving plans. Gregory Gardner, president of the Gardner Group in Dallas, says he is working with a married couple that plans to use the rollover provision for some income tax shifting. They will, for the period allowed by the provision, use their IRA for charitable donations that they would normally take out of income. At the same time, they will use an equity windfall of about $200,000, which will be subject to capital gains and not income tax, as income to replace the IRA funds.
The only drawback to the plan, he notes, is that the couple will not be able to use the donor-advised fund they have used in the past. "I'm still hoping that [donor-advised funds] might be included" in the rollover provision, Gardner says.