Part 1 of our series described the substantial benefits and limits of charitable IRA rollovers. Perhaps the biggest limit is the fact that the law permitting charitable IRA rollovers is frequently in limbo — it was in effect only two weeks in 2014 — forcing clients to wait, and possibly miss the opportunity.
What if you could do something similar to a charitable IRA rollover now, with more clients qualifying, fewer downsides and numerous advantages? You can. We call it the charitable alt-IRA.
FEWER LIMITS
With the charitable alt-IRA, clients contribute long-term appreciated securities to a donor-advised fund. The technique follows financial planning best practices by using qualified charitable gifts to offset tax liabilities.
Clayton E. Hartman, chief investment officer of IFM Capital Advisors in Fort Collins, Colo., has found that “charitable giving is often an important part of financial planning. I advise clients taking IRA distributions to consider offsetting their taxes by donating appreciated securities to qualified charitable organizations.”
The charitable alt-IRA involves fewer limits than the charitable IRA rollover, including:
•
Age. Clients
qualifying for a penalty-free IRA distribution at age 59-1/2 or older, instead of age 70-1/2 or older, qualify for a charitable alt-IRA.
•
Donation amount. The only limits are the availability of stock and the availability of IRA funds. Standard financial and tax planning considerations apply, including deductibility limits for more generous donors.
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Donation beneficiary. The charitable alt-IRA technique creates a donor-advised fund advised by the donor(s). The charities that qualify for grants from donor-advised funds are similar to those for charitable IRA rollovers, but the creation of the donor-advised fund offers donors additional charitable, financial and tax planning benefits.
5 KEY ADVANTAGES
Beyond the fact that it involves fewer limits, the charitable alt-IRA is a flexible strategy offering important advantages over the charitable IRA rollover.
1.
Donor-advised fund benefits. Benefits include low maintenance costs, tax and estate planning options, and flexible charitable giving options, including advising grants to charities now or in future years.
2.
Giving strategically with appreciated securities. Donating appreciated securities from a portfolio can offer clients more strategic giving options than IRA gifts.
3.
Fair market value deduction. The charitable donation of securities — at fair market value if held more than a year — can offset IRA distribution tax obligations.
4.
Increasing tax basis. Donors can use their IRA distribution to buy securities that increase the tax basis of their holdings and/or rebalance their portfolio.
Martin Buehler, chief executive of Vestor Capital, recommends “clients consider increasing the tax basis of donated securities by repurchasing similar securities — or making other investments — to balance their portfolio. Donating appreciated securities and increasing the tax basis of a portfolio can make charitable giving highly tax-efficient."
5.
Stability in charitable, financial and tax planning. The charitable alt-IRA does not require “special” legislative renewal. It depends on established techniques for donating securities and their tax treatment. Change is always possible, but the charitable alt-IRA currently offers more predictability for financial and tax planning than the charitable IRA rollover.
4 STEPS
The charitable alt-IRA technique requires four steps:
1.
Select appreciated securities. Select for donation appreciated securities held more than one year. Clients tend to benefit most when low-tax-basis securities are selected.
2.
Donate to a donor-advised fund. You can donate the securities to an existing donor-advised fund, or create and use a donor-advised fund with an administrator.
3.
Take an IRA distribution. The amount of the distribution depends on whether your client must take a mandatory distribution and on broader financial and tax planning considerations. The charitable deduction from the donated securities can offset taxes owed from the IRA distribution.
4.
Buy securities at a higher tax basis. You can use the IRA distribution to buy back similar securities (or a portion of them) to those donated (Step 2) at a higher tax basis. Alternatively, clients can use the funds to rebalance their portfolio with other investments at a (possibly) higher tax basis. Funds may be used for other purposes but they may not realize some of these opportunities.
A 'GAME CHANGER'
The charitable IRA rollover alternative offers donors a strategic way to use appreciated securities to fund donor-advised funds — with their charitable deduction offsetting IRA distribution tax obligations.
“This is a great technique for advisers to offer their clients,” suggests Dennis Slott, executive vice president at Vestor Capital. “It's not just an alternative to a charitable IRA rollover, it's a technique with financial and tax advantages that stands on its own. For charitable-minded clients, it's a game changer.”
Andrew Hibel is president and founder of The Advise Us Fund, a donor-focused donor-advised fund.
