For Advisors

Congress Procrastinates Again on Tax-Free Charitable IRA Rollovers

December 20, 2013 By Doug Welty

Once again, a special provision of the Tax Code offering older owners of individual retirement arrangements (IRAs) an advantageous way to make charitable donations, is scheduled to expire on December 31. For the remainder of 2013, a traditional IRA owner, age 70½ or over, may transfer directly, tax-free, up to $100,000 per year to an eligible charity, regardless of whether he or she itemizes income-tax deductions.

IRAs Only

Donation can and heart Distributions from 401Ks, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, if you hurry, you may be able to roll assets from those plans into IRAs and donate them before the giving deadline expires.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds and “supporting organizations” are not eligible recipients.

The distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Charitable Rollovers Are MRDs

Amounts transferred to a charity from an IRA are counted in determining whether you have met the IRA’s required minimum distribution (MRD) requirement. And if you have made both deductible and nondeductible contributions to your traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions made to you.

Tax-Free IRA Charitable Rollovers Reinstated by American Taxpayer Relief Act (“ATRA”)

January 3, 2013 By Doug Welty

Donation can and heart From 2006 through 2011, individuals age 70-1/2 or older were eligible to make donations of up to $100,000 directly from their individual retirement accounts (IRAs) to benefit public charities.

Although they received no charitable deduction for such transfers, they didn’t have to report the distribution as taxable income, either. Result: zero tax. And, such a distribution counted toward fulfilling their required minimum distributions (MRDs) for those years.

But Congress didn’t act during 2011 to extend them, so they disappeared during 2012. However, Congress, in its wisdom (and perhaps because nonprofit institutions deluged Congress with lobbyists) reinstated IRA charitable rollovers in the American Taxpayer Relief Act of 2012 (signed into law on January 2, 2013), both for tax year 2013 and retroactively for tax year 2012. And since most taxpayers eligible to make IRA charitable rollovers didn’t make them in 2012 (since there was no guarantee they would get zero-tax treatment), Congress extended the period to make 2012 contributions through January 31, 2013.

If you decide to make an IRA charitable rollover during January, be sure to discuss with your tax advisor whether you should characterize it as a 2012 rollover or a 2013 rollover.

Consider “Front-Loading” Your Life Insurance Trust Contributions

December 7, 2012 By Doug Welty

A proposal that first appeared in the Obama administration’s failed 2012 budget proposal sought to override existing state laws and limit the terms of cascading or “dynasty” trusts to 90 years. This proposal didn’t make it into law, but might resurface again in a future Democratic administration or congress.

Frontload your irrecovable life insurance trust Although there can be no guarantees, any new federal law along those lines probably would treat existing dynasty trusts as grandfathered, and so exempt from this term limitation. However, if gifts were made to such trusts after the effective date of a trust term limitation law, a result might be that the trust would lose its grandfathered status. This already happens with certain grandfathered trusts (those settled before September 25, 1985) with respect to the generation-skipping transfer (GST) tax.

Or, a contribution after the effective date might cause the trust to be divided into a “dynasty share” and a “limited-term share.”

Many of my clients (and many, many people who aren’t my clients yet) with potentially taxable estates have already-existing irrevocable life insurance trusts (ILITs) to which they contribute annually. Many of these trusts are 100% exempt from the generation-skipping transfer tax. Those folks, to the extent possible and practicable, should consider using some of their lifetime exemption to “front-loading” their gifts to such GST exempt ILITs. Just in case.

Virginia Trust & Estate Law Recodification Charts (For Attorneys and Advisors)

October 2, 2012 By Doug Welty

Effective October 1, 2012, Virginia has reorganized and renumbered its statutes relating to wills, estates, trusts, fiduciary powers, fiduciary responsibilities, and related topics in an attempt to put everything (more or less) in one Article of the Code, so that attorneys and advisors will not need to skip so often between different Articles, Chapters, and Sections when drafting or interpreting documents.

Virginia estate planning listservs and forums have been flooded with questions about which “old” sections have been replaced by which “new” sections, and vice versa. The tables that show the renumberings are buried deep in the Virginia Code Commission website and are kind of hard to find, so I’ve put them here:

Table for translating “old” Virginia Code Title 64.1 sections to “new” Title 64.2 sections.
Table for reverse-translating “new” Virginia Code Title 64.2 sections to “old” Title 64.1 sections.
Table of miscellaneous “old” sections from around the Virginia Code that are now in “new” Title 64.2.

(Note: Clients and casual browsers might find these a bit dry.)