December 2003 Bulletin

Proposed IRA changes would benefit charities, donors

By Gene R. Wurth

Legislation making its way through the U.S. Congress in late 2003 could have a major effect on how donors give to charity and the amounts they donate.
House and Senate committees have been considering two versions of an act that would create vast new sources of funding for organizations such as the Orthopaedic Research and Education Foundation (OREF). The two bills, S. 476 (the “CARE Act”) and H.R. 7 (the “Charitable Giving Act”), include a provision to allow donors to use their individual retirement accounts (IRAs) to make lifetime gifts without incurring serious tax consequences.

Act would end IRA gift penalties
This legislation would allow individuals who have reached the age of 701/2 to make a direct transfer of IRA assets to a charitable organization without paying income tax on the funds withdrawn. The assets would go directly to the charity without passing into the donor’s control (and becoming taxable income).

Alternatively, a donor could use those IRA assets to fund a life income arrangement such as a charitable remainder trust or gift annuity. The House and Senate differ on the age at which this would be allowed. In this case, donors would pay income tax only on the amounts they receive from the trust or annuity, not on the initial transfer of the assets needed to fund it.

This change could generate significant giving for charities. A large number of taxpayers have substantial sums of money in their IRAs that they won’t need to live as they planned. However, they may be forced to take income distributions, which increase their tax liability. Also, if they withdraw larger amounts to make gifts, they face immediate tax consequences under current law. The proposed legislation would remove those penalties.

Benefits of giving in your lifetime
This offers new estate planning options for donors that would enable them to see the benefits of their gifts during their lifetime. Without this tax advantage, donors using IRA assets can make such gifts only after death and cannot enjoy seeing the impact of their generosity.

For example, Dr. Jones, age 71, has accumulated $1 million in his traditional IRA. Upon reviewing his finances and considering other sources of income, he realizes that he only needs about half of that $1 million to generate retirement income. Under this pending legislation, he could make a gift of the remaining $500,000 to OREF to fund an award in his name in perpetuity. Under this arrangement, the amount transferred to OREF is not taxed, the award is created and he can enjoy watching the progress of the individuals who receive his award.

Alternatively, the doctor can use the $500,000 to fund a life income gift (depending on the age finally agreed to by Congress). He would receive income for life and pay income tax only on the amount generated annually by the trust or annuity. Since this would be a deferred gift to OREF, the awards in his name could only be made after his death, but he would still have the satisfaction of being recognized for that commitment during his lifetime.

At the time this was written, the two bills had been in conference for several months, so it may be early in 2004 before a resolution is reached. However, the National Committee on Planned Giving says, “This legislation was approved with overwhelming bipartisan support in the House and the Senate. Democrats and Republicans alike have already worked together to develop this legislation.” So there is hope the remaining issues can be resolved quickly.
To discuss how this legislation might affect your ability to make a gift to support orthopaedic research, contact me at Together, we can discuss how this could work to both your advantage and to the benefit of OREF- funded research.

Gene R. Wurth is president/CEO of OREF.

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