Terry Robinson is 73, owns a $2.6 million Individual Retirement Account, and has already maximized his deductible charitable contributions for the year. In this presentation case study, Terry takes advantage of the new charitable IRA rollover rules to increase his gifts to three of his favorite charities during 2006 and 2007.

Note: The following case study is based on provisions that expired on December 31, 2007. Current administration proposals would reinstate transfers from IRAs for charitable purposes.

The Facts:

Terry Robinson is a retired bank executive and a longtime community leader. Now age 73, he enjoys giving back to the community that has been so generous to him.

Terry recently read an article about a new provision in the Pension Protection Act of 2006 that allows tax-free direct transfers from IRAs to qualified charities. "Interesting, very interesting," he thought. When he retired, Terry rolled several qualified plans over into one IRA, which is now valued at $2,600,000 and growing. His minimum required distribution from his IRA will be $92,000 this year.

Terry has three charities that are important in his life: the local hospital where his children were born; his college; and the local community foundation where he established a donor advised fund from which he distributes his charitable gifts.

The Challenge:

Recently Terry was asked for a $100,000 commitment to the hospital's capital campaign. "They've requested I make annual gifts of $20,000 a year for five years," he said. If possible, he would like to complete his hospital commitment sooner than five years and would also like to donate $100,000 to his college scholarship fund as a tribute to his late wife.

Terry already makes annual gifts of cash and appreciated stocks to his donor advised fund at the 50 percent adjusted gross income limit. Can he do more?

The Solution:

With the article still fresh in his mind, Terry called his accountant, Anthony Eves, who confirmed that IRA owners who have attained age 70? can make tax-free charitable distributions directly from their IRAs.

"Although you don't get a tax deduction, the distribution is tax-free because it goes directly to charity and, therefore, is not taxable income to you. In addition, although these gifts are limited to $100,000 per year, they are not subject to the percentage limitation rules that affect the other charitable gifts you are making. Therefore, you can actually increase your overall giving by $100,000 per year," Eves told him. "And, there's another important benefit. Charitable gifts from your IRA can satisfy your minimum annual distribution requirement. Therefore, you can redirect taxable income you would otherwise be required to receive to charity. Keep in mind, the provision is for tax years 2006 and 2007 only, so you should consider acting soon."

"What is a qualified charity," Terry asked? "Direct IRA gifts to the hospital, your alma mater, community foundation or other public charity are qualified charitable distributions under this new provision," said Eves. "However, distributions to donor advised funds or supporting organizations, even if maintained by a public charity, or to private foundations do not qualify. However, I have an idea. Here's how all the organizations can win. Continue making the maximum gifts of cash and stock just as you have been to your donor advised fund up to the 50% of AGI annual limit. Then fund the gifts to the hospital and your college directly from your IRA."

"This sounds great. How do I get started?" Eves then told Terry he would need to instruct his IRA plan administrator to make the transfers directly to the charities on his behalf. "You do this by completing a form listing the charities and the amounts to be transferred."

The Result:

As a result, Terry Robinson decided to make a direct IRA transfer of $100,000 to the hospital in 2006. Paying his pledge early will save the hospital interest. Then, in early 2007 he will make another $100,000 distribution from his IRA to his college. These gifts will more than satisfy his minimum required distribution from his IRA for both years. In addition, he can continue making gifts of cash and other assets to his donor advised fund at his previous levels. A win, win, win!

Copyright 2006 Composer Interactive, LLC and Planned Giving Design Center, LLC. All rights reserved.

This presentation is provided courtesy of Composer Systems, LLC using Composer Interactive Presentation Systems and is provided for educational purposes only. Persons making gifts to charity should review their plans with their own professional advisors. Individuals named in this case study are fictional with any relationship to real persons coincidental.