People often contemplate making charitable contributions at the end of the year. Coupling this with that closing window of time when we still can receive charitable deductions on donations made by Dec. 31, it is no surprise that charitable organizations receive a large percentage of donations toward the end of the year.
This year there is an additional cutoff.
The Katrina Emergency Tax Relief Act allows increased charitable deductions but only through the end of 2005. For clients that have large IRAs, qualified and asset holdings, this is a unique opportunity to engage them in discussions about estate and charitable planning.
Inform your clients that KETRA, the act Congress passed for Hurricane Katrina relief, permits unlimited deductible gifts to charity up to a donor's total income until the end of 2005. Withdrawals from IRAs can be made without 20% withholding or any automatic reduction for income tax.
This IRA "withdrawal and gift" is limited only by adjusted gross income (AGI), but remember that IRA withdrawals increase AGI. Who can receive the gift? For individual (not corporate) grantors, most public charities will qualify; it is not necessary that the gift benefit Katrina relief.
KETRA permits cash gifts only, so gifts of property, stock or land will not qualify. KETRA is not available for private foundations, supporting organization or donor advised funds.
For high income individuals the deductible contribution can be gifted to charity with no Sec. 68-mandated 3% reduction for itemized gifts. The Sec. 68 AGI for 2005 is $145,950.
Planners should recommend counsel from the client's tax advisor because the Sec. 68 limitation still applies to other deductions. State tax, the alternative minimum tax (AMT) and other calculations also could be affected.
CARE Act
Many of us have been waiting for a "charitable IRA rollover" or "CARE" bill that has been proposed and re-proposed several times since 2002. The CARE Act of 2005, introduced in the House and Senate in September, differs from KETRA in that it permits tax-free gifts directly from IRAs.
People over age 70 1/2 can make this direct gift (vs. withdrawal and gift) to charity. Tax-free rollovers to gift annuities and charitable remainder trusts are allowed for IRA owners over age 59 1/2 (Senate) or over age 70 1/2 (House).
If the CARE Act passes this year or next, there may be additional opportunities for contributions of IRAs and qualified money. The need for continuing hurricane-related relief efforts may give Congress the impetus to pass CARE 2005 or extend KETRA. Act quickly: IRA custodians can take a few weeks to process withdrawal requests.
Seed Planting: Reap What You Sow
Financial planning is akin to planting. Though clients may not take advantage of KETRA, year-end is a good time to plant the seeds for estate and charitable planning for 2006. Before you engage clients in discussions, however, bear in mind the four myths of charitable planning.
Myth #1: Family is the No. 1 priority.
What do the wealthy want to become of their wealth? Often, we assume that most clients want it to go to their children, but this is far from reality for many. Advisor-client discussions, if conducted thoughtfully and professionally, may open the doors for people to consider many options, including charitable contributions.
