Following the tragic fire at the Notre Dame Cathedral in Paris, many in the United States are looking for a way to assist the restoration of this iconic Cathedral and historic location. Even in the very public rush of funding, however, individuals should consider all of the tools available to them as well as the tripwires that may catch the unwary. These same principles apply when considering providing support of other tragedies that occur outside of the United States.
One of the tools many individuals may not be aware of is the qualified charitable distribution, or QCD. A QCD is a direct transfer of funds from an IRA custodian to a qualified charity. This type of transfer can be very beneficial for both the charity and the individual. The charity receives the funds. The individual is allowed to include the transfer in the required minimum distributions, or RMDs, for the year while excluding the transfer from taxable income. Keeping taxable income lower reduces taxes and may preserve Social Security and Medicare benefits. Also, because QCDs don’t have to be reported as a charitable income tax deduction, individuals can use QCDs to make charitable gifts and still take advantage of the new higher standard deduction.
There are some basic requirements for QCDs. The IRA owner wishing to make a QCD must be 70½ or older to be eligible, and QCDs are limited to the amount that would otherwise be taxed as ordinary income. The maximum annual amount that can qualify for a QCD is $100,000 whether the transfers are made to one, five, or more charities. For a QCD to count towards a current year’s RMD, the funds must come out of the IRA by the individual’s RMD deadline, generally December 31st. Funds distributed directly to the IRA owner, and then given to charity do not qualify as a QCD.
Likely the biggest tripwire, however, for individuals who want to provide financial support to aid tragedies occurring abroad is the restriction against transferring funds offshore from an IRA. To be a qualified distribution, the transfer must be made to a charity qualified to receive charitable contributions under the United States tax laws. Organizations being named in media reports as potential donees may not be eligible as they may be foreign organizations not recognized as eligible for receipt of a tax deductible charitable contribution for U.S. federal income tax purposes. An unwitting IRA owner who makes a distribution to one of these organizations may find himself owing income tax on a distribution from his IRA that cannot be recovered.
Fortunately, there are a number of qualifying U.S. charities who can receive donations for recovery work being done abroad by foreign organizations. These charities, generally known as “friends of” charities, have assumed the responsibility for ensuring that the use of the funds in the foreign countries is in keeping with the charitable requirements of the U.S. tax laws. A well-run “friends of” U.S. charity should have established best practices such as grant agreements requiring the recipient to use the funds for charitable purposes and provide periodic accountings showing that the funds were expended for the purposes approved by the board, and maintaining proper records regarding recipients.
Another tripwire may have fewer tax consequences but more philanthropy risk. The mention of a charity in a news report does not mean that the charity is approved for receipt of U.S. federal income tax deductible charitable contributions or that it will use the charitable contribution for the purposes intended in the most efficient manner.
Organizations that are very new and/or that have very high expense ratios may not provide the most efficient philanthropic use of the donations received. Individuals contemplating a QCD or outright donation should do more than checking the organization’s tax exempt status and confirming that it is in good standing. Particularly for larger amounts, individuals should review the organization’s financials and most recently filed tax returns. They should make sure expenses seem reasonable given projected income and the scope of the organization’s work, and pay attention to the diversity of the organization’s funding sources. The charity should have proven sustainability over five or more years.
The rebuilding and restoration of the Notre Dame Cathedral in Paris is expected to take many years to complete. Individuals in the U.S. who wish to support the efforts have time to consider all of the tools available to them. For older individuals, a QCD may be an appropriate and beneficial means of making a contribution. Individuals and entities must be careful, however, to avoid the tripwire of making a transfer directly to an offshore charity is not recognized under U.S. federal tax laws. Donors should review the recipient charity carefully to ensure that the funds will be well used and will serve the purpose for which it was intended. As donors consider supporting recovery and outreach efforts after other tragedies occur abroad, these same principles should be considered.
Greta E. Cowart has counseled employers for more than 30 years on best practices in human resources and employee relations issues related to benefits and executive compensation. In her practice, Greta routinely develops strategies for effective administration of claims and other disputes, including defense of grievances, and in litigation considering implications under ERISA, while also considering applicable labor and employment laws. Greta also provides fiduciary training and review of fiduciary operations to improve the documentation of the fiduciary process. Greta is a former chair of the Employee Benefits Committee of the ABA Section of Taxation, and has served on the U.S. Department of Health and Human Services CHIP Working Group.
Kal Grant is an experienced wealth planning attorney and trust and estate strategist. Kal works closely with clients to counsel them through the optimal creation, use, and coordination strategies of estate planning vehicles and techniques, including trusts, family-owned entities, charitable planning, and various disposition matters. With more than 25 years in the industry, Kal has gained particular knowledge and understanding of the processes and resources necessary to guide individuals, families, and nonprofit organizations through the creation, establishment, and sustentation of their charitable mission. She previously led an advisory team dedicated to providing nonprofit organizations strategic advice and planning, governance and fiduciary assistance, philanthropic research and best practices.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice.