WealthManagement Magazine

Katrina and IRAs

The relief efforts related to hurricane Katrina are doing what two decades of lobbying from the wealth advisory community could not: convincing legislators to let investors make tax-free donations from their IRA accounts. As part of an effort to encourage hurricane relief donations, the House and Senate are expected to quickly approve special tax legislation that would include a tax break a charitable

The relief efforts related to hurricane Katrina are doing what two decades of lobbying from the wealth advisory community could not: convincing legislators to let investors make tax-free donations from their IRA accounts.

As part of an effort to encourage hurricane relief donations, the House and Senate are expected to quickly approve special tax legislation that would include a tax break — a charitable IRA rollover — that would expire Dec. 31.

Though the window of opportunity is admittedly small, advisors could use the legislation to adjust clients' year-end tax strategies. “This is something the trusts and estate bar has been encouraging for a long time,” says Susan Slater-Jansen, New York-based partner in the law firm of Sonnenschein Nath & Rosenthal and chair of Trusts & Estates magazine's Retirement Benefits Committee.

Under the pending legislation, anyone 70 1/2-years old and older would be allowed to roll over amounts from their IRA accounts (and other pension plans that can first be rolled into an IRA) directly to a qualified charitable organization on a tax-free basis.

Taxpayers aged 59 1/2-years old and older would be able to transfer IRA funds to a charitable remainder trust and give that remainder to charity without tax consequence. This means they will not have to pay income tax on the funds taken from their IRAs, as normally they would.

Conrad Teitell, the philanthropy expert who's been lobbying Congress for these tax breaks since 1982, says that for many clients avoiding taxes on distributions from IRAs is the “equivalent of a charitable deduction.”

David Leibell, Teitell's law partner at the Stamford, Conn., firm of Cummings & Lockwood, says the tax breaks could appeal particularly to members of the elderly rich — the over-70 crowd who don't need to live on their IRAs. They are forced to take distributions every year, which are taxed as ordinary income. This year, they can take the distributions tax-free and help Katrina victims, too.

Teitell is thrilled at the prospect of his long-sought “Charitable IRA Rollover” becoming law, even if it does, as he puts it, “turn into a pumpkin” on Dec. 31.

“It means that a huge, untapped source of funds will be available for charitable giving,” he says. There's an estimated $3 trillion to $4 trillion in pension plans. And, Teitell says, literally every week, charities get calls from people who would like to donate portions of their pensions, but are stymied by tax laws.

Rorie Sherman, editor in chief, Trusts & Estates magazine.

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