Life Time Tax Free Distributions from IRAs to Qualified Charities

by

Stuart A. Rader, Esq. 

The recently enacted Pension Protection Act of 2006 (?Act?) authorizes persons over age 70-1/2 to make life-time income tax free distributions directly from a traditional Individual Retirement Account (?IRA?) to a charity in 2006 and 2007.  Under prior law, if an individual wished to make a life time charitable contribution funded from an IRA, a two-step process was required:  (1) receive the IRA distribution as income; and (2) donate the distributed amount to the charity and seek the charitable deduction as an itemized deduction subject to phase out limitations. (If one did not itemize deductions, then no charitable deduction was available).  In contrast, the Act allows an IRA owner to make a qualified charitable distribution (?QCD?) without incurring income or a corresponding charitable deduction.

QCD General Requirements:

·        Donor must be 70-1/2 years old at the time of the gift.

·        Donor must own IRA; no other type of qualified plan qualifies such as a SEP IRA or 401(k) plan.

·        IRA Custodian must distribute directly to the charity selected by Donor.  If the IRA Custodian distributes to the Donor, then it is income regardless whether the Donor then re-directs that amount to the charity.

·        Charity must be a qualified charity which is defined as a public charity or conduit (non-operating) foundation; donor advised funds and supporting organizations are not eligible.

·        Distribution must otherwise fully qualify under charitable deduction rules. (A distribution to a charity for a fund raising dinner will not qualify because the value of the meal is not deductible). 

·        Limit is $100,000 per year.

·        Available in years 2006 and 2007.

Example 1.  Dennis is 76 years old and has an IRA with a balance of $500,000. On December 1, 2006 the IRA custodian makes a $100,000 QCD as instructed by Dennis. The distribution is: not included in Dennis?s income; and is not used in computing his charitable deduction for 2006.

Example 2. Same facts as Example 1, except that Dennis is 78 and the IRA Custodian makes the $100,000 QCD on December 1, 2008.  Because the new law is effective only for 2006 and 2007, the entire distribution is income and would be eligible for charitable deduction if Dennis itemizes, subject to the phase out limitations for itemized deductions.

Planning Tips.  Plan early for a 2006 QCD because it must be made on or before December 31, 2006.  Since, IRA Custodians have only a few months to update their IRA administration to accommodate QCDs, donors should contact their existing Custodian to determine whether it has implemented a plan to comply with the Act and if not, consider transferring the IRA to a Custodian who has such a plan.

Not intended as legal advice but rather a general discussion.  No transaction should be entered into without competent legal and tax advice.  

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August 28, 2006