Case Study: The Charitable IRA Rollover

Case Study: The Charitable IRA Rollover

A Presentation Case Study
Case study posted in on 18 September 2006| 7 comments
audience: National Publication | last updated: 18 May 2011


Terry Robinson is 73, owns a $2.6 million Individual Retirement Account, and has already maximized his deductible charitable contributions for the year. In this presentation case study, Terry takes advantage of the charitable IRA rollover rules to increase his gifts to three of his favorite charities that are effective through 2009.

The Facts:

Terry Robinson is a retired bank executive and a longtime community leader. Now age 73, he enjoys giving back to the community that has been so generous to him.

IRATerry recently read an article about a  provision in the Emergency Economic Stabilization Act of 2008 that extends tax-free direct transfers from IRAs to qualified charities. "Interesting, very interesting," he thought. When he retired, Terry rolled several qualified plans over into one IRA, which is now valued at $2,600,000 and growing. His minimum required distribution from his IRA will be $92,000 this year.

Terry has three charities that are important in his life: the local hospital where his children were born; his college; and the local community foundation where he established a donor advised fund from which he distributes his charitable gifts.

The Challenge:

Recently Terry was asked for a $100,000 commitment to the hospital's capital campaign. "They've requested I make annual gifts of $20,000 a year for five years," he said. If possible, he would like to complete his hospital commitment sooner than five years and would also like to donate $100,000 to his college scholarship fund as a tribute to his late wife.

Terry already makes annual gifts of cash and appreciated stocks to his donor advised fund at the 50 percent adjusted gross income limit. Can he do more?

The Solution:

With the article still fresh in his mind, Terry called his accountant, Anthony Eves, who confirmed that IRA owners who have attained age 70? can make tax-free charitable distributions directly from their IRAs.

"Although you don't get a tax deduction, the distribution is tax-free because it goes directly to charity and, therefore, is not taxable income to you. In addition, although these gifts are limited to $100,000 per year, they are not subject to the percentage limitation rules that affect the other charitable gifts you are making. Therefore, you can actually increase your overall giving by $100,000 per year," Eves told him. "And, there's another important benefit. Charitable gifts from your IRA can satisfy your minimum annual distribution requirement. Therefore, you can redirect taxable income you would otherwise be required to receive to charity. Keep in mind, the provision is for tax years 2006 and 2007 only, so you should consider acting soon."

"What is a qualified charity," Terry asked? "Direct IRA gifts to the hospital, your alma mater, community foundation or other public charity are qualified charitable distributions under this new provision," said Eves. "However, distributions to donor advised funds or supporting organizations, even if maintained by a public charity, or to private foundations do not qualify. However, I have an idea. Here's how all the organizations can win. Continue making the maximum gifts of cash and stock just as you have been to your donor advised fund up to the 50% of AGI annual limit. Then fund the gifts to the hospital and your college directly from your IRA."

"This sounds great. How do I get started?" Eves then told Terry he would need to instruct his IRA plan administrator to make the transfers directly to the charities on his behalf. "You do this by completing a form listing the charities and the amounts to be transferred."

The Result:

As a result, Terry Robinson decided to make a direct IRA transfer of $100,000 to the hospital in 2006. Paying his pledge early will save the hospital interest. Then, in early 2007 he will make another $100,000 distribution from his IRA to his college. These gifts will more than satisfy his minimum required distribution from his IRA for both years. In addition, he can continue making gifts of cash and other assets to his donor advised fund at his previous levels. A win, win, win!


Composer InteractiveCopyright 2006 Composer Interactive, LLC and Planned Giving Design Center, LLC. All rights reserved.

This presentation is provided courtesy of Composer Systems, LLC using Composer Interactive Presentation Systems and is provided for educational purposes only. Persons making gifts to charity should review their plans with their own professional advisors. Individuals named in this case study are fictional with any relationship to real persons coincidental.

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Knowing how much money you

Knowing how much money you want to retire with is one thing, but figuring out what it will take to get there is quite another. Part of retirement planning is knowing what to do with your IRA or however many you have, is what you're going to do with it once you retire. The right strategy depends on what kind of retirement accounts you have your nest egg in

Plan administration issues

Sounds like a win/win/win solution, but only if the IRA administrator cooperates. I hear that some plan administrators will only send a check to the plan participant, made out to the charity, rather than to the charity itself. In that case, will such a transfer qualify under the new rules? What if the plan participant receives the check late in 2006 and doesn't forward it to the charity until 2007? Is that a distribution in 2006 or 2007? And how are these distributions reported on the 1099-R by the plan administrator? The devil is always in the details.

Win! Win! Win!

What are the implications of the Act for shielding IRA direct transfers to charity from STATE income? I suspect that some states accept the IRS rules for income, but others may not have acted lesgislatively on this provision.

Good case, but split the contributions, please!

That way, if Mr. Robinson dies before the new year, his intent that both charities receive money will be at least partially implemented.

The Details

For a technical overview of the new rules and discussion of these and many other issues, refer back to our article entitled, The Pension Protection Act of 2006: A Guide to Charitable IRA Rollovers. The article can be found at .

CHIRA Offers An Alternative

I assume the same facts, 73 yr old male, $2.6M IRA, $100k PPA gift in Y1 and $100k PPA gift in Y2. $2.4M in relevant IRA assets. As an addition to the plan, the donor could tax-free rollover $1.0M to a self directed custodian. With the proper approval from charity, the donor loans $1.0M to the non-profit hospital, 5% simple interest, or $50k/year. The donor agrees to underwriting and $500k is dedicated to servicing an insurance policy on his life providing a death benefit of at least $1M. The charity is the owner and beneficary of the policy, subject to collateral assignment reverting back to the donor's IRA in the amount of the outstanding loan balance. The $200k in PPA gifts for Y1 and Y2 sustain the interest for several years. Donor pledges in future years at least $50k to sustain the interest. (In your example, it appeared as though 96k was available as a result of MRD). The insurance policy at death pays to charity in excess of the outstanding loan balance in full satisfaction. The death benefit is excluded from gross income and UBTI calculations. What is the result? Under the current plan, $100k is received in Y1, $100k is received in Y2, less than 6 months apart. Under the CHIRA plan, $500k (or $1M less $500k premium reserve) in Year 1. I apologize in advance for putting a link but check out for PLR 200741016 and additional information. I welcome all comments

Using the Composer system

As an attorney who uses the Composer system, let me add that it is a great way to help your client visualize the scenario you are describing. For instance, I frequently use the Will, Bypass Trust and Spouse cards, to illustrate my explanation of that estate tax savings plan to my clients. This IRA charitable roll over case study shows how flexible the Composer system can be.

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