Take-Away: A bipartisan sponsored Bill is currently working its way through Congress which would allow taxpayers age 65 and older to make transfers from their IRAs to fund charitable remainder trusts (CRT) and charitable gift annuities.

Informal Title: The Legacy IRA Act, House Bill 1337

Background: Current law permits a taxpayer age 70 ½ or older to make tax-free transfers from their traditional IRA to charitable organizations up to $100,000 per year. But there are obvious limits to this opportunity, specifically the age requirement, the maximum amount transferred from the IRA, the required use of a traditional IRA from which to make the charitable gift, and the requirement that the transfer must go from the IRA custodian directly to the designated tax exempt entity. While the transfer is not subject to a charitable income tax deduction, it will satisfy, in whole or in part, the taxpayer’s required minimum distribution obligation for that calendar year.

Proposed Legislation: H.R. 1337 would obviously expand the current law by permitting more taxpayers (between 65 and 70 ½) to use their IRAs for philanthropy, while also continue to derive the economic benefit from the transferred IRA assets for their lifetime. Thus, the proposed Legacy IRA would permit the taxpayer to retain retirement income while assuring the tax exempt entity that it will ultimately receive the transferred IRA assets on the donor’s death. Some specifics of the Legacy IRA Bill follow:

  • The qualified charities under the Legacy IRA are the same for a Qualified IRA Distribution, i.e. donor advised funds, supporting organizations, and private operating and pass-through foundations are excluded as eligible charities [but see below.]
  • Rather than limit the transfer amount to $100,000, the Legacy IRA would permit a transfer of up to $400,000. If the taxpayer is over age 70 ½, the combined maximum amount for direct and life-income transfers from their IRA is $400,000, with a limit of $100,000 on direct, i.e. Qualified IRA Distribution,  transfers.
  • The only potential beneficiaries of the life-income plans, i.e. the charitable remainder trust or charitable gift annuity, are the donor and his/her spouse. Thus, no other person or family member is an eligible beneficiary of the life-income plan that receives the IRA assets. Accordingly, upon the death of the donor and his/her spouse, all the remaining assets held in the CRT, or which are subject to the gift annuity paid by the charity,  pass to the charity.
  • While there is no current income tax deduction available to the donor, just like with the Qualified IRA distribution, it is the equivalent to a charitable income tax deduction, as the funds are not taxed on the distribution, which is comparable to an income tax charitable deduction.
  • Mandating the use of life-income plans, e.g. a charitable remainder trust or a charitable gift annuity, assures that the annual income tax payments will come close to, or may even be greater than, what the taxpayer would have otherwise received as a required minimum distribution had they retained the funds in their IRA instead of transferring the amounts to a life-income plan.
  • The revenue loss projections with regard to the Legacy IRA are not too serious. The Bill’s projected cost is $106 million over 10 years. Because payouts from the CRT or charitable gift annuity are 5% or more, generally there will be more income paid from the life-income plans than under the normal IRA required minimum distribution rules.
  • Permitted life-income plans would be a charitable remainder unitrust (CRUT), a charitable remainder annuity trust (CRAT), and a charitable gift annuity (CGA), so long as the present value of the charitable gift portion is at least 10% of the initial transferred amount.
  • The Legacy IRA is being presented as a middle-class IRA rollover since it permits those individuals who are less wealthy to participate in charitable giving, but it also affords them a steady flow of income during their retirement years.
  • The Legacy IRA would use a 4-year trial period in which to assess the efficacy of the provision that excludes from the taxpayer’s gross income the IRA distributions to the life-income plan.

Side-Note: In yet another Bill pending in Congress (Senate Bill 1343,  co-sponsored by Senators Thune and Wyden) the Charity Act would permit Charitable IRA Distributions to be made directly to donor advised funds, but it would also impose more serious reporting obligations on donor advise funds to include reports on inactive or dormant donor advised funds, and it would also force the sponsors of donor advised funds to disclose average payouts over the most recent three-year period.

Conclusion: It is hard to say if either of these Bills will get much traction in Congress in light of the growing federal deficit. Moreover, there is already promised activity in the House later this month on legislation to make the expiring income tax cuts created by the 2017 Tax Act permanent,  thus adding to the deficit, all of which may ultimately distract Congress from these charitable giving Bills. But it is exciting to see some attention being given to encouraging more philanthropy by the middle-class.