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.

Joseph, along with advisors, see the provision as most applicable for clients with a preexisting inclination to donate to charity and an IRA account that isn't the core of their retirement nest egg, and those whose estates include sizeable IRA accounts that would be prone to a double income and estate tax hit if passed on to a beneficiary.

Joseph cites the example of a married couple he works with. The husband just turned 70 1/2, and has a total portfolio of several million dollars, of which several hundred thousand is locked up in an IRA account. The couple also are "very generous people" with plans to give some of their assets away. Without the charity rollover provision, the couple would be forced to either take their minimum IRA distribution as regular income, subject to income tax, or donating it to charity and taking the tax deduction.

With the provision, they will be able to devote up to $100,000 per year to the charities of their choice, and at the same time subtract the amount from their taxable income. Meanwhile, they can rely on their equity portfolio for income, at the smaller capital gains tax rate. "This was perfect for them," he says.

It's a good fit for clients who have little in the way of itemized deductions and who are at the age where minimum IRA distributions are required, says Michael Foltz, principal of Balasa Dinverno & Foltz LLC, a private wealth manager in Itasca, Ill. "We have seniors who have paid off mortgages and little in the way of itemized deductions" who could take advantage of the rollover provision, Foltz says.

Herbert Daroff of Baystate Financial Services in Boston has been advising some of his clients to leverage the charity rollover into larger donations through the use of life insurance policies. Although the law varies from state to state, most states allow charities to have an insurable interest in their donors.

Under this strategy, a client would give their $100,000 rollover directly to the charity, which would then use the money to take out a life insurance policy on the donor. The charity would then receive the death benefit as a donation upon the death of the donor, Daroff says.

From the client's standpoint, nothing changes, except "the charity may list you in the $500,000 donor club instead of the $100,000 club," he says. "It's a great way to leverage a $100,000 gift."