From the April 2007 issue of Investment Advisor • Subscribe!

An Underutilized Charitable Option

More education is needed to encourage tax-free gifts to nonprofits from clients' IRAs

A provision in the Pension Protection Act (PPA) of 2006, which allows individuals over the age of 701?,,2 to make a one-time donation of up to $100,000 from an IRA tax-free to a charitable institution of their choice, is not picking up as much steam as some would have expected, and experts do not see much hope of it being extended beyond its current expiration date, Dec. 31 of this year.

Most observers consider the measure itself a positive development, both for the charities (donor advised funds and private foundations are excluded) as well as retirees that have the means to give away $100,000 from an IRA without feeling a pinch. However, the option is limited to only these individuals, says Robert Sharpe, president of the Sharpe Group, a leading provider of philanthropic services to the nonprofit community that is based in Memphis.

"The provision is only for people who have IRAs, so it is aimed at a fairly limited market, since most people have their money in 401(k)s or 403(b)s," Sharpe says. "There are people who have rolled over into IRAs, but we are talking about a pretty small universe here."

The charitable IRA rollover allows a donor to give a gift directly to a charity, rather than withdrawing cash and reporting it as taxable income, or giving it to a donor-advised fund or trust. Charities have been angling for this kind of charitable transfer option for years, and it is the first of its kind allowing people to give charitable gifts directly from their IRAs while they are alive.

Yet Frank Simon, founder and president of Findlay, Ohio-based P.R.O.F.I.T. Financial LLC, also believes that the provision's appeal is limited, not just because it is aimed at a fairly small set of retirees, but also because it has not resonated with either that subset of retirees or charitable groups at large.

"Only two of our firm's clients have asked about the provision," Simon reports. "We asked several of the charitable organizations we work with about the experiences they have had, and they also found little interest."

The low response rate, according to Simon, is a clear indication that awareness of the provision must be increased among retirees, their advisors, and the charitable institutions that wish to avail themselves of lump sum donations; many of those charities do not have properly formulated communication strategies with which to reach out to funding sources and potential donors.

Indeed, it is only the very large, well-established institutions that have been successful in benefiting from IRA rollover money under the PPA provision, Sharpe says (Harvard University, for instance, has received gifts totaling $2.5 million in the months since the measure was introduced; 11 of those gifts were of $100,000). These organizations have in place sophisticated marketing and fund-raising programs, but they also have connections with people who can easily make gifts of $100,000 or above, Sharpe says.

"This provision mainly benefits large institutions like well-known universities," Sharpe confirms, "and the kinds of people who can make a simple call and say 'Fine $50,000 to my college and another $50,000 to my wife's college."

But even if the provision benefits a small segment of the U.S. population, it would be still worth it for advisors to make their clients aware of the option, in particular those who don't keep abreast of developments in tax legislation, Sharpe says. An IRA, he says, is in fact the best pocket from which to make a large donation, because once a client dies, her beneficiary will be hit with both estate and income taxes on that IRA.

Indeed, donors can benefit greatly once they understand the income tax reductions available using qualified monies instead of using an outright cash gift, Simon agrees.

"The tax reductions allow donors to increase their gifts over and above what they perceive they could give just using cash," he says.

But even if there is a definite tax advantage for wealthy people over the age of 701?,,2 to make donations from their IRAs, the bottom line is that they are wealthy people, and any measures that have been taken to benefit such a relatively small section of the American population is not likely to receive much support now that the political tides have turned, and the Democrats have taken control of the Congress.

"Treasury is waiting to see what the final result of this provision will be, and assess how much it cost them in 2006," Sharpe says. "However, whether it is extended or not is a political consideration, and many in Congress would rather have in place a measure that subsidizes the charitable gifts of many, and not just a few over the age of 701?,,2."

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