IRA Planning: Beyond the Donor Advised Fund

The “baby boomer” generation—the second largest generation in U.S. history—is on the cusp of a significant financial transition.

The first baby boomers were born in 1946, which means that by the end of 2017 they’ll have crossed the 70.5 year of age threshold. Tens of millions of more boomers will cross this same threshold over the next 20 years.

Why is this transition important? It signifies that many of those boomers with traditional IRA accounts will have to start taking required minimum distributions (“RMD”) from those accounts starting in 2017.

Moreover, given the fact that IRAs held an estimated $7.8 trillion in assets at the end of the third quarter of 2016, there is potentially a lot of money in motion over the next several decades.

For many of your clients, their IRAs may be their primary source of income in retirement. However, for your clients that do not rely solely on their IRAs for retirement income, the IRA may be their secret charitable planning weapon.

The Chicago Community Trust is ready to partner with your clients to help them use their IRAs to their fullest.

Understanding the IRA charitable rollover

In 2015, legislation passed making the IRA “charitable rollover” permanent. The IRA charitable rollover allows for an IRA owner (who is at least 70.5 years old) to make a distribution of up to $100,000 directly to a public charity instead of taking a required RMD. The IRA owner does not recognize the distribution as income because the funds go directly to charity.

However, there are some important limitations and qualifications regarding what counts as a qualified charitable rollover.

Specifically, an IRA account owner may not make direct distributions to a private foundation, a supporting organization or a donor advised fund and have those distributions count as a qualified charitable rollover.

But even with these restrictions, your clients have options when it comes to charitable planning with their IRAs, and The Chicago Community Trust can be a trusted partner in helping your client achieve their charitable goals through their IRAs.

Legacy planning with IRAs

As you know, your clients cannot make a distribution from an IRA to the Trust to fund a donor advised fund account and have the distribution count as a charitable rollover.

However, your clients can make qualifying charitable rollovers from their IRAs to the Trust in order to achieve other philanthropic goals.

For instance, suppose your client is passionate about helping young people in underserved communities access arts and cultural events in Chicago. Your client could set up a field-of-interest fund with The Chicago Community Trust that makes grants from the fund to support organizations that align with her passions.

She can set up the fund and fund it with distributions from her IRA that qualify as charitable rollovers. Your client could even list The Chicago Community Trust as the ultimate beneficiary of the IRA so that her legacy of promoting the arts continues long after her death.

Consider another client who makes the same annual gifts each year to five specific organizations. This client would like to continue his annual giving even after his death, but he is worried that if he sets up a donor advised fund then subsequent generations of advisors may direct the fund assets to other organizations.

As a solution, The Chicago Community Trust can help your client set up a designated fund that lists the organizations to support each year with an annual gift. The client can make distributions from his IRA each year that qualify as a charitable rollover as a way to “pre-fund” the designated fund. The fund can even be structured so that grants do not flow out of the fund until after the donor’s death, allowing the fund assets to accumulate and grow while the donor is alive. See this in action in our case study of one Trust donor who’s using a designated fund to help his qualified charitable distributions provide scholarships for local students.

With each passing year, more and more baby boomers will have to begin the process of taking RMDs. As you and your clients think about making the most of your clients’ IRAs, The Chicago Community Trust is available to brainstorm ideas and solutions that help make your clients’ charitable goals a reality.

For more information, please contact Tim Bresnahan at 312.616.8000 ext. 158 or by email at tbresnahan@cct.org.