In the August newsletter we alerted you to the new Charitable Giving provisions of the Pension Protection Act of 2006 (PPA), whereby individuals over the age 70-1/2 can direct that distributions be made from their IRA’s direct to  charities.  These gifts would be in addition to the gifts normally allowed and are capped at $100,000.  Understandably, charities are excited about the potential for these gifts and I am aware that many people who are not currently using IRA distributions will take advantage of this to satisfy their charitable pledges or desires in a simple, tax-efficient manner. 

The purpose of this newsletter is to highlight some of the other more pertinent provisions of PPA that can either benefit or burden individual tax payers.

 Inherited Retirement Plans.  When the owner of a qualified retirement plan, IRA, 401K, or other qualified plan dies, the beneficiary has an “inherited” plan account.  For simplicity, we will call these an Inherited IRA.

 For tax years beginning in 2007, an inherited plan benefit under a 401K or other qualified plan can be transferred to an Inherited IRA by the beneficiary.  This is an important benefit of PPA because some qualified plans, including 401K’s, do not permit a “stretch” by the beneficiary. 

 A “Stretch” means that the beneficiary can take required minimum distributions each year based on the beneficiary’s own life expectancy, and not have to take the benefit out in a lump sum, with the consequent income tax burden that this entails.

 Typically, individual IRA’s, with administrators such as Schwab, Fidelity or Vanguard, are equipped to handle “Stretch” Inherited IRA’s.  As a side note, an Inherited IRA carries the name of the decedent as well as the name of the beneficiary and is designated as an “Inherited IRA”.  The beneficiary can withdraw any part or all of the funds in the account at any time, but the Stretch benefit occurs when the beneficiary only withdraws the minimum amount required according to the beneficiary’s age.  This new provision, which extends the same benefits to all other qualified plans, allowing what amounts to an inherited roll-over, can be immensely beneficial to beneficiaries who want to keep their inherited account in a tax deferred status and delay income tax payments. 

 Increase in 40K Contributions.  The new law increases the maximum contribution to a 401K plan to $15,000 for 2006, with an additional $5,000 for taxpayers over the age of 50.  These are pre-tax contributions, of course, all or a portion of which may be matched by the employer.  These increases take effect right away.

 Increased IRA Contributions.  For 2008 and later years, the maximum IRA contribution increases to $5,000.  Naturally, there are more liberal allowable contributions for other kinds of plans, including 401K’s, but this liberalization, scheduled for 2008, will have general application.

 Charitable Records.  PPA imposes new requirements for substantiating charitable contributions of “cash, check or other monetary gift” if made after August 17, 2006.  The donor has to maintain a record of the contributions (such as a log), retain cancelled checks, or retain written communications from the donees.  This provision will apply regardless of amount.

 What Effect Will It Have?  Many taxpayers have been claiming charitable deductions under a category of “miscellaneous”, or have not been providing the written evidence for charitable contributions such as church pledges.  Presumably, this new statutory change will be implemented by regulations which will impact tax preparers, who will have to be more vigilant in asking for the written evidence that the law requires.  A copy of the check register should suffice to meet this requirement, and it may be that this will be no more onerous than past rules, with the exception that a deduction for “miscellaneous cash gifts,” such as money dropped in the collection plate, will not be allowed.

 Conclusion.  As you can see, there are both good and bad provisions in the new law.  In general, there are taxpayer friendly provisions with broad application.  The Congress is cracking down on certain “donor advised funds” which have been maintained by the large financial institutions, in addition to local community foundations.   Direct contributions from IRA’s are not permitted to these types of accounts, for example, probably because of past publicized abuses. 

 Hopefully, some of you will be able to take advantage of the new increases in retirement plan contributions and the special IRA charitable gifts.  Check out the latter with your income tax adviser to see if they will benefit you. 

 If you have any questions concerning application of the new law as it pertains to your estate plans, please contact Jim Modrall at (231) 941-9660 or any of the other attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Vicki P. Kundinger,  Susan Jill Rice,  Gary D. Popovits,  Lawrence K. Kustra, H. Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.