Congressional Gifts


by Laurie Kulikowski


New laws may allow tax-free donations of IRA withdrawals and give small donors a break.


The pleasant headache of having too much money socked away in an IRA may apply to only a few clients. But rather than spend it down and pay a hefty tax bill, older IRA owners may soon be able to take a tax-free rollover option--if they donate the proceeds to qualified charities.


Under the Senate's CARE Act of 2003, sponsored by finance committee chairman Charles Grassley (R-Iowa), donors over the age of 591/2 can establish a split interest trust, such as a charitable remainder trust or charitable gift annuity, while those over 701/2 can donate outright to a charity in order to get the IRA gift exclusion. The counterpart bill in the House, known as the Charitable Giving Act of 2003 and sponsored by Roy Blunt (R-Mo.), uses age 701/2 for both deferred gifts and direct donations.


"Many of the people we work with say, I don't really need all of my IRA to live on, why do I have to take all of this money out?'" says Ray Ferrara, a planner with ProVise Management Group in Clearwater, Fla. "And many of those clients are charitably inclined."


Versions of these bills have been circulating in Congress for years, but this year prospects for passage were looking rosy. The Senate bill was passed in April, and the House approved its version in mid-September. The two bills were due to go to conference by early October, and legislative sources say President Bush was expected to sign the final version into law.


The timing could be tight. Congress planned to finish its fall session by the end of October. And the Senate bill (but not its House counterpart) would allow direct gifts to get the exclusion immediately, sending financial advisers scrambling to create plans for clients in the last two months of 2003. Deferred gifts in both bills would start in 2004.


Both proposals would allow individuals who don't itemize their tax returns to take dollar-for-dollar deductions of as much as $250 for total contributions above $250 made directly to charities ($500 for joint filers donating more than $500). Individuals who take the standard deduction have not been entitled to charitable deductions since 1987.


The new deduction would only last for two years, however. The Senate version would apply in 2003 and 2004, the House version in 2004 and 2005.


Although this charitable giving legislation may seem like a slam dunk, there has been some opposition to the bills. "The obvious reason it could be in jeopardy is we have record deficits," Ferrara says. "But you can't forget to weigh that against money not going to charities. The charities could use the money for a variety of things that might lessen the burden for county, state, and federal programs." The Senate bill has an estimated cost of about $12 billion.


Along with deficit concerns, Congress has several other pending tax bills to consider, which could muddy the waters. "They've got a lot to do in a short amount of time, so it's hard to say what's going to happen," says Kevin Anderson, director of government relations and public policy for the Council on Foundations, a philanthropy advocacy group in Washington.


Other critics fear the bill will result in underfunded retirement plans, as people take advantage of government incentives to use the plans for other purposes. "We set up these vehicles to provide for retirement, but we've got a whole list of growing exceptions to let you get the money without penalty that are unrelated to retirement," says Mark Luscombe, principal analyst for state and federal taxes at CCH in Riverwoods, Ill. Despite his fears about underfunding, Luscombe thinks this year's proposals are likely to pass.


If so, planners believe many clients will embrace the new opportunities for charitable giving. "In the past, there has been a lot of negative press when a senior citizen wanted to make donations to charities from his or her IRA. There were so many adverse consequences to it," says Bruce Brittain, an RIA with Brittain Financial Advisors in Alpine, Utah. "It might open up additional avenues for charities to approach the public by suggesting these tax planning and life income planning tools."


"This is a way that we can encourage gifting," says Kathy Longo, a planner with Accredited Investors in Edina, Minn. IRAs "are a heavily taxed asset to pass on to the next generation."