EXPERIENCED-BASED COMMENTS ON H.R. 5171
My nearly 40 years of experience in philanthropy has convinced me of the importance of H.R. 5171 to American charities. While serving as a senior planned giving officer at Northwestern University in Evanston, Illinois and as Director of Planned Giving and Executive Director of Development at the University of Washington in Seattle, I regularly met with donors, many of whom contributed via gift annuities and charitable remainder trusts. When I left the University of Washington to form a consulting company, I worked with donors, not just to universities, but to all types of charities – religious, social service, health, environmental, and those concerned with the arts. In the course of my career, I have also served as president of the National Committee on Planned Giving (now called the Partnership for Philanthropic Planning) and chair of the American Council on Gift Annuities, the two national organizations concerned with charitable gift planning. These leadership positions have given me an opportunity to observe what stimulates charitable gifts.
My experience has taught me the following:
• The primary motivation for making charitable gifts is to support organizations that are dedicated to improving the quality of life.
• Tax incentives enable people to make larger gifts than would otherwise be possible for them , but tax savings do not motivate gifts. There is a financial cost to a gift unless the parties engage in abusive practices. Because people are better off financially not making a gift, they must care about the cause to make a contribution.
• Many people , who would like to make a charitable gift, cannot afford to surrender income-producing capital. However , they would be able to make the gift under an arrangement, such as a gift annuity or charitable remainder trust , where they retain income for life or a period of time. These are usually people of more moderate wealth. The truly wealthy can afford to make large outright gifts, but less affluent individuals, who are no less philanthropic , must make their gifts in ways that protect the security of their families. That is why gift annuities and charitable remainder trust are very popular ways of giving and why charities like to offer these alternative ways of giving to their donors.
• The provision in the PATH Act, enacted last year, allowing individuals over age 701/2 to transfer each year up to $100,000 from their IRA to one of more charities without the distributed amount being added to taxable incom e, was welcomed by charities. A number of individuals have made transfer s varying from a few thousand dollars to as much as $100,000. They are able to forfeit any future income from such a distribution, because their remaining retirement funds, plus other investments, are sufficient for a secure retirement. However , those of more modest wealth , who would like to make a gift from their IRA, but who need income from all of their assets, are unable to take advantage of the legislation.
• That is why H.R. 5171 would be so beneficial to charities and to their donors. Under current law, if a person would like to contribute $50,000 of IRA funds for a gift annuity, it would be necessary to take a fully-taxable distribution and then contribute the proceeds.
The problem is that $50,000 would be added to taxable income, but the charitable deduction might be only $15 ,000. Consequently, the gift would entail a significant tax cost, and this discourages such gifts. The problem would be eliminated if it were possible to make a direct transfer from the IRA to the charity for a gift annuity. Nothing would be added to taxable income, and no charitable deduction would be allowed. Instead of leaving everything in the IRA and taking withdrawals during retirement, the person would now take taxable withdrawals from remaining funds in the IRA and receive taxable payments from the gift annuity. Because all distributions and payments continue to be fully taxable, there is little tax cost, as the scoring of this legislation demonstrated.
• Donors would have the satisfaction of making a charitable gift to support a favorite cause while retaining the retirement income they need. Charities could count on the remainder of the gift annuity contribution being available for charitable purposes when the payment
• The majority of people who would take advantage of H.R. 5171 probably would choose a gift annuity. While the average size is between $40,000 and $50,000, many are smaller, often in the $10,000 to $20,000 range. Individuals who are able to contribute a larger
amount may choose a charitable remainder trust , especially if they want future payments that are related to investment performance.
In summary , based on my experience I think that H.R. would facilitate a volume of charitable gifts far in excess of the modest revenue cost.
*Frank Minton, Frank Minton Consulting , LLC, 16538 Beach Dr. N.E., Lake Forest Park , WA
98155 ; Email: FDMinton@gmail.com ; Phone 206 -365-5154