Older Americans Flock to Give in Response to Tax Incentives

Federal law poses as many challenges as benefits, fund raisers say; museums especially worried by a rule that restricts art donations

Days after mailing a bright-orange, one-page information sheet about new federal tax incentives for older Americans who contribute to charity directly from their individual retirement accounts, Suzy Kendrick hit pay dirt.

A check for $49,600 arrived at Ms. Kendrick’s office at the Lahey Clinic, a Burlington, Mass., health-care organization.

There was, however, one major problem.

The financial institution that manages the retirement-fund money — and sent the check to the clinic — did not indicate anywhere in its correspondence the name of the person who made the donation. As a result, the donor ran the risk of not getting credit for his gift — and not being able to exclude the $49,600 from his taxable income for 2006.

Happily for the donor, Ms. Kendrick’s staff was able to comb through the Lahey Clinic’s database to determine his identity.

But the mix-up highlights the difficulties many charities and financial institutions are facing nearly four months after Congress passed a sweeping tax law aimed at increasing charitable giving while cracking down on abuses.

The Pension Protection Act, passed in August, has sparked hope among many fund raisers, largely because of a provision that allows donors older than 70 to transfer up to $100,000 from their individual retirement accounts to charity, both this year and next.

The IRA provision alone could generate as much as $1-billion in donations for charity by the time it expires on December 31, 2007, fund-raising experts predict.

Already, many groups say they have received substantial gifts because of the law.

But optimism surrounding the law has been tempered by widespread confusion among donors, charities, and the financial companies that manage individual retirement accounts.

“There is a learning curve, not only for the donor but also for charities,” says Ed John, vice president of planned giving for United Way of America.

Museums See a Drop in Giving

While the individual-retirement-account provision affects the most nonprofit groups, charities have also been faced with other fund-raising challenges and opportunities because of the new law.

Museum officials are trying to figure out how to entice donors to keep giving artworks after Congress restricted the tax breaks donors can take for certain donations.

Meanwhile, land-trust groups are scrambling to communicate with potential donors about incentives for conservation gifts. Those incentives — like the IRA provision — are scheduled to expire at the end of 2007.

Because the special tax incentives are in effect for such a short time, many charities have been quick to send information about the retirement-account provision to their older supporters.

At least 157 retirement-account gifts totaling $4.3-million have been reported so far, according to the National Committee on Planned Giving, which is keeping track of the donations with the goal of persuading Congress that the incentives should be extended beyond 2007.

Ninety-six of those donations went to colleges and universities, while another 16 gifts went to health-care organizations. Twenty-four gifts have been for the maximum $100,000. More than a third were for less than $5,000, according to the committee.

Getting the Word Out

Among charities that are seeing action already is the Lahey Clinic.

Ms. Kendrick, the clinic’s director of gift planning, says her office mailed notices explaining the new law to about 7,000 local financial advisers and donors and included the informational insert about it in a fall newsletter to donors. In turn, the clinic has not only received the $49,600 IRA gift from one donor, it is also expecting another — $100,000 to be split between the Lahey Clinic and Harvard University — before the year’s end.

“I’m trying to arm the major-gift officers with information so as they talk to their donors and prospects, they can pass on the information, and the person can get back to me with specific questions,” Ms. Kendrick says.

But even that information is not enough to alleviate confusion — especially in light of the fact that the Internal Revenue Service has not yet spelled out exactly how the gifts should be handled.

“You really have to watch the communication between the donor, the administrator, and the charity,” Ms. Kendrick says.

In many cases, the weak link in the communication chain has been financial companies that manage retirement accounts, many of which are unfamiliar with the new law, says Kathryn Miree, a Birmingham, Ala., planned-giving consultant.

That has been problematic in some cases because the IRA contributions must be made directly from the retirement accounts to the charity, without first going to the donor, to qualify as a tax-free withdrawal.

“Some of the custodians [of the IRA money] don’t know what they’re talking about, don’t know how to make it happen,” Ms. Miree says. “When donors are calling and getting that person on the other end of the line, they end up calling the charity and saying, ‘It’s not happening.’”

Even large financial-services companies have been slow to process IRA transfer requests from donors. Citigroup, the national financial-services company, didn’t begin training its employees on how to handle customer requests for transferring IRA assets to charity until mid-November, according to a spokesman.

Late last month, in response to inquiries from financial institutions, the U.S. Treasury issued a letter that offers IRA fund managers more-detailed information about how they are expected to make and report distributions from IRAs to charities. That guidance, however, came more than three months after charities were able to accept the gifts.

With such delays and confusion, charities should have already communicated with donors able to make an IRA gift this year, says Robert Shafis, director of major-gift planning at the Museum of Science and Industry, in Chicago. “If you have donors, you’d better advise them to get started. If donors start calling on December 30 expecting it to get done, they’re going to be out of luck.”

Mr. Shafis says his office sent an informational mailing about the new IRA provisions to about 75 donors in September and received an immediate response from one donor who wanted to make $100,000 donations to the museum both this year and next.

The process went smoothly, he says, but it took several weeks for the museum and the IRA administrator to work out the details.

The process should be much more refined by 2007, charity leaders say, but it is still too early to say whether the provision will reap the estimated $1-billion.

“Whether that assumption is wishful thinking, we’ll only know in a year’s time,” says Diana Aviv, chief executive officer of Indepedent Sector, a Washington group that represents national charities and foundations.

‘One Conversation’

Despite the uncertainties, nonprofit groups that have received gifts say the process is simpler than it first appears.

The Jewish Foundation of Memphis, for example, helped charities it supports distribute a flier about the IRA incentives shortly after the law was passed.

The flier encouraged recipients to consider making an IRA gift to one of the groups supported by the foundation. One of the recipients called the foundation within two days; he had already given his IRA administrator permission to give $100,000 to support an emergency fund-raising campaign for Israel administered by the Memphis Jewish Federation, one of the organizations supported by the foundation.

“He had one conversation,” says Laura Linder, the foundation’s executive director. “The next day, the gift was transferred.”

Terrie Conrad, planned-giving director at the Virginia Military Institute Foundation, in Lexington, Va., says her organization has received a $100,000 retirement-fund gift and has two more in the works for the same amount.

Ms. Conrad says those gifts are in part a response to a one-page information sheet the institution sent to about 4,800 prospective donors in mid-September. The institute has also posted information about the IRA rules prominently on its Web site.

“It’s not hard to understand,” Ms. Conrad says. “You just have to be really sure you are communicating the correct information to your donors and doing it quickly. If you procrastinate in this business, you’re not going to be in it for long.”

Ms. Conrad says her organization decided to move quickly to create a system for processing and reporting donors’ gifts, even though it has not yet received instructions from the IRS about what information charities are responsible for providing to the donor, the government, or the company that handles the retirement money.

The VMI Foundation has created receipts for IRA gifts that include the name of the fund administrator on the left side, the name of the donor on the right, and has sent them to both the donor and the fund administrator.

Virginia Military also decided to add the words “this is not a tax-deductible receipt” because, like many institutions, it has found that donors mistakenly think they can take a tax deduction for making an IRA gift under the new law.

The law doesn’t work that way, however. Its benefit to the donor is that money transferred to charity isn’t counted as taxable income.

While nonprofit groups await guidance, the IRS has released some information. When Congress passed the new IRA break, it said donors would not get a tax break if they donated their IRA money to foundations, donor-advised funds, or so-called supporting organizations.

Last month, the IRS decided to reissue instructions on how charities classified as supporting organizations can apply to change their status to become a type of group that would qualify for IRA gifts.

While the IRA provision has prompted some charities to ask the IRS how they can apply to change their classification to become eligible for retirement-fund gifts, officials at the tax agency could not say how many charities have applied as a result.

Museum Gifts

As confusion lingers over how to handle IRA gifts, leaders of museums and other cultural institutions are also dealing with the aftereffects of the Pension Protection Act’s effort to limit deductions available for donations of art. Congress took action out of concern that some donors had been receiving overly generous deductions for their gifts of art.

Under the old law, donors could pledge a portion of an artwork over many years, write off a percentage of its value each year, and keep the work in their possession until they died — as long as they allowed the museum to display it periodically.

Now donors must relinquish ownership of the work within 10 years after they make such a gift, and the amounts donors can write off are based on the value of the work at the time it is pledged, not its value when the institution takes full possession of the piece. As a result, donors who make gifts of art that have grown substantially in value are getting a far smaller write-off than they did under the old law.

Some museums say the new law has already caused them to lose valuable gifts of art. At the Museum of Fine Arts, Houston, Peter Marzio, the museum’s director, says a donor who had been considering donating a work valued at between $7-million and $8-million backed away from the donation after the law was passed.

“All I can say is nothing good has been said about the change,” says Mr. Marzio. “Any time you lose an opportunity to get an important painting or sculpture, it’s significant.”

The American Association of Museums and the Association of Art Museum Directors have been trying to persuade Congress to change what they deem the most restrictive parts of the new law.

The organizations in September wrote to the Senate Finance Committee asking that donors again be allowed to retain ownership of their donated artworks until death, provided they pledge, in writing, to follow through on their gifts.

In addition, they asked lawmakers to restore a provision of the old law that gave museums flexibility as to when they would display artworks in their collections. To assuage lawmakers’ concerns that some donors were taking inflated deductions, the museums proposed that all gifts valued in excess of $1-million be referred to a panel that would determine its true worth.

Without such changes, says James Cuno, president of the Art Institute of Chicago, museums will lose out on the opportunity to acquire significant works. Under the old tax law, he says, his museum received pieces by Monet, Picasso, and Van Gogh.

“Museums cannot realistically expect to have the funds to purchase such major works on a regular basis,” Mr. Cuno wrote in a letter to the Senate Finance Committee seeking changes to the law. “It is the public that gains when a museum receives gifts of art, since these masterpieces can now be viewed by anyone who visits the museum, rather than being passed down in families or being sold to private owners.”