The Charitable IRA Rollover Opportunity

Conclusion–All of the above are potential tax benefits made possible by the charitable IRA rollover.

Life Insurance Considerations

One of the problems with charitable giving using life insurance is the periodic premium–it has to be paid. The donor has to write a check every year, maybe every month. Either the donor pays the premium directly to the insurance company or the donor gives it to the charity and counts on the charity to pay the premium.

The one-year nature of this provision, and its allowable maximum of $100,000, works to avoid the periodic payment problem. With a $100,000 contribution, a substantial policy can be purchased as a single premium contract.

Because the policy will be owned by a tax exempt organization, the fact that it's a single premium contract–and therefore a MEC–is of no consequence. And because the policy is single premium contract, there are no periodic premiums; the first premium is the last one. The one year nature of the provision also makes it natural to think of this as a single premium policy.

The details

A client can distribute less than $100,000 as a charitable IRA rollover, although the smaller the distribution and the charitable rollover, the less likely it is that life insurance can be used for the transaction.

The distribution must be made from an otherwise taxable standard IRA or Roth IRA. Charitable rollover distributions are deemed to come first from the taxable portion of an IRA distribution. If a client owns an IRA with nontaxable nondeductible contributions, the charitable rollover distribution will come first from the taxable amount (deductible contributions and earnings).

Here's an example: A client owns an IRA worth $100,000, of which $45,000 is deductible contributions and earnings. The other $55,000 consists of nondeductible contributions. If the client were to make a charitable IRA rollover distribution of the full value in the IRA, only the $45,000 of deductible contributions and earnings will qualify under the act. An itemized income tax charitable deduction must be claimed for the $55,000 of nondeductible contributions.

Deleted sentence is redundant, it repeats the first sentence of the prior bullet pointThe charitable rollover is not permitted from qualified plans, 403b annuities, Keoghs, SEPs and SIMPLEs.

The charitable rollover distribution must be gifted directly to a qualified charity. Therefore, the IRA owner must work with the IRA custodian or product provider to ensure the direct gift can be accommodated. If a client takes a distribution from his or her IRA and then chooses to make a gift to a charity, the requirements of the charitable IRA rollover will not be met and the distribution will be income taxable. The client must then claim an itemized income tax charitable deduction.

The selected charity must be a qualified charity as defined within ?170(b)(1)(A) of the Internal Revenue Code. The following entities are not considered a qualified charity: a charitable remainder trust (CRT), charitable gift annuity (CGA), pooled income fund, private foundation (other than conduit private foundations that redistribute the amount to a public charity within a designed time period) and donor advised funds.

Lastly, the qualified charity must provide written acknowledgment of the gift as described within Treasury Regulations ?1.170A-13(f). This may cause record-keeping challenges since the gift must come directly from the IRA custodian. Therefore, the client should inform the charity that the gift is coming and work directly with the charity to obtain a written receipt.

The charitable IRA rollover represents a wonderful opportunity for clients to benefit churches, Scout troops, schools, colleges, universities, hospitals, and so on. The process is relatively straightforward and should be easy to implement.

And life insurance can provide an excellent opportunity for clients to multiply and magnify their generosity. Unfortunately, you and your clients only have one year to take advantage of it, so start today.