L E G I S L A T I V E  A L E R T

June 2007
Seize the Opportunity—




by Conrad Teitell*

YOU can make it happen. Please reproduce this position paper and distribute it widely. Friends don’t let friends miss an opportunity to promote laws that will benefit charities and the people they serve. *This paper was prepared by Conrad Teitell, Cummings & Lockwood, Six Landmark Square, Stamford, CT 06901, phone: (203) 351-4164, fax: (203) 351-4535, e-mail: cteitell@cl-law.com

The House Ways and Means Oversight Subcommittee wants written comments on the provisions relating to charities in the Pension Protection Act of 2006.

Background. PPA ‘06 contains over thirty provisions relating to charities, including charitable giving incentives and exempt organization "reforms." Some provisions were intended to improve accountability among donor advised funds and supporting organizations. "Most of the provisions," according to Subcommittee Chairman John Lewis (D-GA), "were never discussed on a bipartisan basis, nor the subject of Committee hearings, during the 109th Congress."

The Subcommittee is interested in the tax-exempt community’s views on the impact of these recently-enacted provisions on charities. It is particularly interested in how these new rules affect, or will affect, charitable efforts and the difficulties that have arisen in implementing these provisions. The Subcommittee also requests comments on the provisions scheduled to expire on December 31, 2007.

THE IRA/CHARITABLE ROLLOVER—SUGGESTED ACTION: This is an excellent opportunity for charities—in large numbers—to ask the House of Representatives to extend the rollover beyond the December 31, 2007 expiration date and ask that it be expanded too. Urge the Subcommittee to recommend to the full Ways and Means Committee that the House enact The Public Good IRA Rollover Act of 2007. The IRA/charitable rollover bill was recently introduced—with bipartisan support—in the House (H.R. 1419) and in the Senate (S. 819).

Current law (for 2006) and expiring on December 31, 2007. Allows an individual 70½ or over to transfer directly from his or her IRA up to $100,000 to publicly supported charities (except donor advised funds and supporting organizations). Private foundations aren’t qualified recipients (except for private operating foundations and passthrough foundations).

The Public Good IRA Rollover Act—H.R. 1419 in the House and S. 819 in the Senate would:

* Make the rollover permanent.

* Remove the $100,000 cap.

* Remove restrictions on the types of charities to which IRAs can be rolled over.

* Allow a tax-free rollover for life-income plans (charitable remainder unitrusts, annuity trusts, gift annuities, pooled income funds) as long as the IRA owner is 59½ or over. The only beneficiaries of a life-income plan could be the donor, the donor and spouse or solely the spouse. A charity could also be a beneficiary. (Direct rollovers—as opposed to life-income rollovers—would be for IRA owners 70½ or older.)

Why life-income rollovers? Many individuals would like to give part or all of their IRAs to charity, but need the retirement income from their IRAs. Allowing them to roll over their IRAs at age 59½ or over to a charity’s life-income plan would allow them to keep retirement income and make a charitable commitment. The charities could plan on receiving the gift after the life interest terminates.

A life-income rollover is truly an All-American IRA/Charitable Rollover. It would encourage philanthropy by all Americans—not just those who can afford to part with their assets now and not just those who itemize their deductions on their tax returns.

The equivalent of a non-itemizer charitable deduction. The ability to roll over an IRA to charity directly—or for a life-income plan—gives charitable tax incentives to the approximately two-thirds of taxpayers who take the standard deduction. Not being taxed on income that would otherwise be taxed (withdrawal from an IRA) is the equivalent of a charitable deduction.

Simply stated, a rollover to a charity’s life-income plan is just putting an existing IRA in a different basket. The individual still receives life income. But now, there’s an eventual gift to charity. The charity can better plan for its future and these gifts will stimulate other gifts.

Why a rollover for life-income gifts starting at age 59½ instead of 70½ (as for direct rollovers). Typically, IRA owners don’t start drawing down their IRAs at 59½, but wait until 70½. Then they string out the payments over the lives of the owner and a spouse. And they can then s-t-r-e-t-c-h out the payments for a grandchild, for example, for many more years. By allowing a rollover of an IRA for a charitable life-income plan at age 59½, the government could start taxing IRA income much sooner. All income from a charitable rollover would be fully taxable.

An IRA rollover for a life-income gift comports with the government’s policy of encouraging individuals to provide for and safeguard retirement funds. An individual who receives income from a charitable remainder trust that has been funded by an IRA rollover can be viewed as simply changing the caretaker of his or her retirement funds. The stringent requirements of the Internal Revenue Code and Treasury regulations that are designed to safeguard the charity’s remainder interest also safeguard the individual’s life-income interest.

Examples of how the life-income charitable rollover would work:

Mary Gordon, a retired school teacher, transfers $50,000 from her IRA to Teachers’ College in exchange for an annuity that will pay her for life. The income she receives from the annuity is fully taxable as ordinary income—so the government receives just as much tax as if the gift annuity had not been created and the IRS taxed the withdrawals from her IRA.

Doctor Brown, a retired dentist, would like to make a significant gift to his dental school at his class’s 50th reunion. His major asset, apart from his house, is his IRA. He transfers $200,000 from his IRA to a charitable remainder unitrust that will make payments to Dr. Brown and his wife and then to the survivor for life. On the survivor’s death, the trust assets will be given to his dental school. All the income paid to the Browns will be fully taxable as ordinary income—so the government receives just as much tax as if the income was paid to the Browns directly from the IRA.

Under the Public Good IRA Rollover Act, IRAs can be transferred to four types of life-income plans. A short description of each follows.

The charitable gift annuity. In exchange for a gift, a charity pays a donor a fixed-dollar amount for life. The amount is set at the time of the transfer based on the age of the annuitant. Because the payments are lower than the payments would be had the same amount been transferred to an insurance company, a good part of the transfer is a charitable gift.

The charitable remainder unitrust. A transfer is made to a separately invested trust that annually pays the beneficiary a fixed percentage (set at the outset) times the fair market value of the trust assets as revalued each year. At the death of the beneficiary, all the assets belong to the named charity or charities.

The charitable remainder annuity trust. Similar to the unitrust (above), except that the beneficiary receives a fixed-dollar amount each year for life, with a remainder gift to charity.

The pooled income fund. A donor’s gift is transferred to a charity’s pooled fund and commingled with the gifts of other donors. Each beneficiary receives his or her share of the fund’s income for life. On the beneficiary’s death, the charity removes assets from the fund equal to the then value of the beneficiary’s interest in the fund and uses the assets for its charitable purposes.

Good public policy. Charities serve the public and relieve federal, state and local governments of burdens they would otherwise incur. IRA charitable rollovers would be significant additional sources of support for our nation’s charities.

Charitable gift enabler—billions of additional dollars for charities. According to the IRS’s latest figures (Spring 2003, IR-2003-80), existing charitable life-income plans have a total value of almost $94 billion.

It is difficult enough to picture 1 billion dollars, let alone 94 billion. But some economists have given us a visual aid. A million dollars worth of thousand dollar bills makes a pile six inches high; a billion dollars worth of thousand dollar bills would stack up as high as the Washington Monument.

So it would take a pile of bills as high as 94 Washington Monuments to equal the amount that individuals have contributed to life-income plans to benefit charities.

Many trillions of dollars are currently in IRAs. Just imagine how many more Washington Monuments of thousand dollar bills will be given to charities after the Public Good IRA Rollover is enacted.

It’s a not-so-brave-and-a-complicated new world. Because of security concerns and technology advances, you have to jump through hoops to make your views known. Here’s how:

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS—JULY 31, 2007 DEADLINE: Any person and organization wishing to submit for the record must follow the appropriate link on the hearing page of the committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov select "110th Congress" from the menu entitled, "Committee Hearings" http://waysandmeans.house.gov/Hearings.asp?congress=18. Select the request for written comments for which you would like to submit, and click on the link entitled, "Click here to provide a submission for the record." Once you have followed the online instructions, completing all informational forms and clicking "submit" on the final page, an email will be sent to the address which you supply confirming your interest in providing a submission for the record. You MUST REPLY to the email and ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by close of business Tuesday, July 31, 2007. Finally, note that due to the change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, call (202) 225-1721.

FORMATTING REQUIREMENTS: The Committee relies on electronic submissions for printing the official record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of submissions and reserves the right to format it according to its guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response to a request for written comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.

1. All submissions and supplementary materials must be provided in Word or WordPerfect format and MUST NOT exceed a total of 10 pages, including attachments. Submitters are advised that the committee relies on electronic submissions for printing the official record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.

3. All submissions must include a list of all clients, persons, and/or organizations on whose behalf the submission is made.


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