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A provision of the Tax Code allowing for the charitable donation of IRA assets will soon expire. The Pension Protection Act of 2006 liberalized the rules allowing for the direct donation of assets held in an IRA to charitable organizations.

Under Code Section 408(d)(8), added by the act, IRA owners who have attained age 70 years, six months are permitted to distribute up to $100,000 per year of IRA assets directly to a qualified charity without causing such a transfer to be taxable to the IRA owner. This exclusion from income is set to expire on Dec. 31, 2007.

Prior to the act (and after 2007), if an IRA owner desired to make a lifetime charitable gift utilizing IRA assets, the IRA owner would be required to take a distribution of IRA assets and recontribute such assets to the charity. In addition to the two-step mechanics of this process, the IRA owner would have to recognize taxable income equal to the amount of the distribution and would be required to claim a charitable deduction for the amount contributed to the charity.

Although in theory the charitable deduction should offset the income recognized on the IRA distribution, such is not always the case because of the limitations imposed on charitable deductions under Code Section 170, where deductible contributions are limited to a percentage of the donor’s adjusted gross income. Under Code Section 170(b)(1)(A), charitable cash contributions to a public charity are generally deductible only to the extent of 50 percent of the donor’s adjusted gross income (AGI).

Under Section 408(d)(8), a qualified charitable distribution eligible for the exclusion is any distribution from an IRA to a public charity described in Code Section 170(b)(1)(A), other than a private foundation or a donor advised fund. Permitted charities include churches, tax-exempt educational organizations, tax-exempt hospitals, the federal government or a state or any political subdivision of either and organizations organized and operated exclusively for charitable, religious, educational, scientific or literary purposes or for the prevention of cruelty to children or animals or to foster national or international amateur sports competition.

There is no requirement that a qualified charitable distribution be directed to only one eligible charity. Rather, multiple charitable distributions can be made in any year provided that the aggregate of all such distributions does not exceed $100,000.

This exclusion from income applies only if the charitable contribution deduction for the distribution would otherwise be allowable under present law, determined without regard to the percentage limitations contained in Code Section 170(b)(1)(A). For example, if the deductible amount is reduced because of a valuable benefit received in exchange for the contribution, or if a deduction is not allowable because the donor did not obtain sufficient substantiation for the donation, the exclusion is not available with respect to any part of the IRA distribution.

The exclusion only applies to distributions that are made directly by the IRA to the eligible charity and that are made on or after the date on which the IRA owner attains age 70 years, six months. The exclusion does not apply to distributions made from simplified employee pensions (SEPs) or SIMPLE IRAs. The exclusion also does not apply to qualified retirement plans, such as profit sharing or 401(k) plans. The exclusion does apply to Roth IRAs, where an exclusion may generally not be necessary since “qualified distributions” from a Roth IRA are not taxable.

Distributions that are excluded from gross income as qualified charitable distributions under the act are not added to the IRA owner’s other non-IRA charitable contributions for purposes of determining the percentage limitations under Code Section 170(b)(1)(A). For example, if an individual with adjusted gross income of $100,000 makes a $50,000 charitable contribution with non-IRA assets and also makes a qualified charitable distribution of $50,000 from his IRA in the same year, the contribution made with non-IRA assets would not be deemed to exceed the 50 percent of AGI limitation contained in Section 170(b)(1)(A).

Of significant benefit, qualified charitable distributions are counted for purposes of satisfying the required minimum distribution rules under Code Section 401(a)(9) which, generally, require IRA owners to commence the distribution of IRA benefits upon the attainment of age 70 years, six months. Accordingly, an IRA owner who makes a qualified charitable distribution in an amount equal to or in excess of his required annual minimum distribution is considered to have satisfied his minimum distribution requirement for the year of the distribution. As a planning technique, IRA owners who do not otherwise need their required minimum distributions can direct such distributions to eligible charities (up to $100,000) in satisfaction of the minimum distribution requirements.

If the IRA owner has an IRA that includes non-deductible contributions, a special rule applies in determining the portion of the distribution that is includable in gross income (but for this provision) and thus is eligible for qualified charitable distribution treatment. Under the special rule, the distribution is treated as consisting of income first, up to the aggregate amount that would be includable in gross income (but for this exclusion) if the aggregate balance of all IRAs having the same owner were distributed during the same year. In determining the amount of subsequent IRA distributions includable in income, proper adjustments are required to be made to reflect the amount treated as a qualified charitable distribution under this special rule.

It should be noted that not all IRAs permit a direct distribution to a charity. It is left to each IRA trustee or custodian to decide whether to offer this feature to their IRA customers. Some IRA trustees and custodians do not provide this feature in their standard IRA documentation. Accordingly, IRA owners who wish to make qualified charitable distributions must first check with their IRA trustee or custodian.

The direct charitable distribution of IRA assets has several favorable tax consequences: the avoidance of the recognition of income on distribution; the avoidance of the charitable deduction limitations under Section 170(b)(1)(A); credit against required minimum distributions; and the exclusion of the distributed amount from the donor’s estate for estate tax purposes. The limited window for such direct distributions from IRAs will soon close. Individuals who have attained age 70 years, six months, and who have charitable commitments or charitable intentions, should seriously consider the use of IRA assets on or before Dec. 31, 2007.

MARK L. SILOW is the administrative partner and chief operating officer of Fox Rothschild. Silow formerly was chairman of the firm’s tax and estates department. Silow’s work involves a broad range of commercial and tax matters including business and tax planning, corporate acquisitions and dispositions, real estate transactions, estate planningand employee benefits.

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