National Fundraising Associations Back Charitable Giving Legislation in 'CARE' Act, S. 1924 Now Before U.S. Senate -- Passage of Tax Measures Vital in Encouraging Donations

WASHINGTON, Mar 05, 2002 (ASCRIBE NEWS via COMTEX) -- The leaders of the four major fundraising associations, on behalf of their combined membership of 82,000 fundraisers and gift planners, have called for passage of charitable giving incentives, such as those found in S. 1924, the Charity Aid, Recovery, and Empowerment (CARE) Act of 2002, recently introduced by Senators Joe Lieberman (D-CT) and Rick Santorum (R-PA).

"The charitable giving provisions in the CARE Act are good public policy and will give donors access to new resources for the support of charitable organizations and their public service mission," the leaders wrote in a joint letter to the Senate Finance Committee, which is currently considering the bill.

The letter was signed by Paulette Maehara, President & CEO of the Association of Fundraising Professionals; William C. McGinly, Ph.D., President & CEO of the Association for Healthcare Philanthropy; Vance T. Peterson, Ph.D., President of the Council for Advancement and Support of Education; and Tanya Howe Johnson, Executive Director of the National Committee on Planned Giving.

In the letter, the heads of the fundraising organizations highlighted the importance of the IRA rollover, which would allow individuals to roll over funds in their IRAs to charitable organizations without incurring a tax penalty. There are over $2.5 trillion in IRA funds currently and even a small percentage of charitable rollovers would result in millions of additional dollars going to charity.


How does current law treat charitable gifts made from IRAs?

Individuals may withdraw funds from a traditional Individual Retirement Account (IRA) without incurring an early withdrawal penalty once they reach age 59 1/2, although the withdrawals will be taxed as ordinary income. Under the so-called minimum distribution rules, an individual must begin making withdrawals by April 1 following the year in which he or she reaches age 70 1/2. In either case, when a donor withdraws IRA funds in order to make a charitable gift, he or she will pay income tax on the withdrawal, offset to varying degrees by a charitable deduction for the gift. As a consequence, very few individuals donate IRA funds to charity during their lifetimes.

Why do donors want to give some of their IRA assets to a charity?

Due to the strong economy and the stock market boom over the last several decades, many individuals have more than sufficient funds to retire comfortably. In addition, individuals are encouraged under the current tax laws to liquidate their IRAs during their lifetime since their estates will face confiscatory tax rates of up to 80 percent if their IRA funds are left to a dependent or family member (other than their spouse). Under current law, any amounts left in an IRA when an individual dies may be taxed as income to the beneficiary, and are also considered assets for the purposes of calculating that individual's estate tax liability.

How would the proposal change these rules?

If the proposal were enacted, a donor who had reached the defined age would be allowed to exclude any IRA funds withdrawn and transferred to a charity from his or her income when filing a tax return for that year. The donor would be eligible to claim a charitable deduction only to the extent that the IRA was funded with after-tax dollars.

The amounts transferred to the charity could be in the form of an outright gift or used to fund a deferred or life-income gift (e.g., a charitable remainder trust, gift annuity or contribution to a pooled income fund). If the IRA funds are rolled over as a life-income gift, the donor will pay taxes on the resulting annual income payments from the charity.

What are the advantages of the proposal?

The individuals and communities served by the nation's charitable sector will benefit from the proposal because the proposed change will encourage a significant amount of new contributions from individuals who would no longer have to pay tax on a charitable gift of IRA funds. These contributions will support programs for those less financially well off through important services, such as those provided by health, education, social service, and cultural organizations.

To the extent that individuals roll IRA funds into a life-income gift before reaching age 70 1/2 and begin to receive taxable income from that gift, the proposal generates tax revenues sooner than the government would otherwise receive them. Also, increased giving to charities will expand needed services that the government might otherwise be called upon to provide.

What is an example of how this proposal would work?

Mr. Smith, age 60, has accumulated approximately $1,000,000 in his IRA and other qualified retirement plans. Although he believes he will only need about $750,000 of these funds for his retirement, he plans to leave his IRA intact for another 10 years rather than pay the tax on withdrawal of assets as required under current law.

If legislation is enacted allowing IRA charitable rollovers with favorable tax treatment, Mr. Smith can transfer IRA funds he will not need for retirement to a charity as an outright gift or a life-income gift. Either way, IRA funds withdrawn and transferred to the charity will not be subject to tax. His gift would be tax-deductible only to the extent that he had previously funded his IRA with after-tax dollars.

If Mr. Smith prefers a life-income gift, for example, he can transfer $250,000 to a 7 percent charitable remainder annuity trust, from which he will receive $17,750 in annual taxable income each year for life (a 7 percent return on the $250,000). Over the first 10 years, Mr. Smith (assuming a 39.6 percent tax bracket) may pay income taxes totaling as high as $70,290 on income totaling $177,500.

What is the legislative history of this proposal?

In the 105th Congress, then-Representative Barbara Kennelly (D-CT) and Senator Kay Bailey Hutchison (R-TX) introduced IRA charitable rollover bills in the House and Senate. Representative Phil Crane (R-IL) and Senator Hutchison reintroduced these bills (H.R. 1311 and S. 1086, respectively) in the 106th Congress and received the bipartisan support of 126 cosponsors in the House and 14 cosponsors in the Senate.

In 1999, the Senate, as part of an omnibus tax bill (S. 1429, the Taxpayer Refund Act of 1999) approved a version of the proposal that would have permitted IRA charitable rollovers for both direct and deferred gifts once the donor reached age 70 1/2. The conference version of this omnibus legislation, which retained the eligibility age of 70 1/2, but eliminated deferred gifts, was vetoed by President Clinton for reasons unrelated to this proposal. History repeated itself in 2000. The conference report to an omnibus bill that included tax legislation (H.R. 2619, the Taxpayer Relief Act of 2000) passed the House, but was not taken up in the Senate due to objections from the Clinton administration.

President Bush included the original version of the proposal in his tax plan, which was initially released during the 2000 Presidential campaign, and formally submitted to Congress in February. In the 107th Congress, Representatives Crane and Neal (D-MA) and Senators Hutchison and Durbin (D-IL) reintroduced the original IRA charitable rollover legislation (H.R. 774 and S. 205).

Currently the IRA Rollover is included in the Charity Aid, Recovery and Empowerment (CARE) Act of 2002, introduced by Sens. Joe Lieberman (D-CT) and Rick Santorum (R-PA). Under this legislation, individuals may roll over funds in their IRAs to charitable organizations without incurring a tax penalty beginning at age 67.

What is the revenue estimate for the proposal?

The Bush Administration has estimated that the proposal will cost $2.261 billion over 10 years.


- Syracuse University lost a $1.5 million gift because the donor could not rollover his IRA into a charitable remainder trust.

- A 71-year-old male donor with a $1.3 million IRA wanted to make a life income gift to a major public university in Texas. He wanted to receive annual income payments that would help ensure the care of his wife, who is in the early stages of Alzheimer's. Given the tax consequences of such a gift under current law, the donor has not been able to make the charitable contribution.

- The husband of a hospital volunteer at a medical center in Tennessee would like to establish a charitable trust to benefit cancer research in honor of his late wife. He wants to use retirement plan assets of $1.8 million to establish this cancer research fund, to provide himself with annual payments for retirement income, and to reduce the tax burden on his heirs, which would be greater for IRA assets than other appreciated securities. He has been advised against such a gift because of tax disincentives under current law.