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HAWAII ENACTS GIFT ANNUITY REFORM LEGISLATION

July 26, 2004

Effective July 1, 2004, Hawaii’s new rules for charitable gift annuities took effect. Led by the efforts of Neal Myerberg and Barry Shain, who wrote the new legislation and joined with a coalition of Hawaii legislators to gain its passage, Hawaii has become one of the most regulated states in the country in order to protect both consumers and Hawaii charitable organizations.

Highlights of the new law:

I. Benefits Hawaii Consumers

• Assures that there will be funds for the payment of charitable annuities by providing for a segregated annuity reserve fund that can only be used for annuity payments and for no other purposes.
• Assures that the segregated annuity fund will be adequately funded by requiring that it meet acceptable actuarial standards and by requiring that a surplus of 10% be included in the fund over and above the required reserves.
• Requires that any charitable annuity agreement include in writing that the annuity is (a) not subject to regulation by the Insurance Department, (b) is not insurance under Hawaii law, and (c) is not protected by any state guaranty fund. This will make consumers more informed when they decide whether or not to purchase a charitable annuity.
• Assures that the minimum amount required for the segregated annuity reserve fund be $100,000 at inception and at all time.

II. Benefits Hawaii Charities

• Enables any nonprofit charitable organization that has conducted business in Hawaii for at least 10 years to issue charitable annuities provided it maintains assets of at least $200,000 in cash, cash equivalents or publicly traded securities in addition to the minimum of $100,000 in segregated annuity reserve funds.
• Enables all Hawaii charities, therefore, who meet this asset test ($200,000) and who have at least $100,000 in a segregated annuity reserve fund to issue gift annuities to Hawaii contributors.

Myerberg Shain will provide guidelines and advice about the application of this new law to Hawaii charities and consumers. There will be seminars in the fall 2004 that will provide specific information with regard to marketing gift annuities and complying with the requirements of the new law. Please visit this website for details.

Neal Myerberg
Barry Shain

T A X    A L E R T
October 27, 2003

IRA PLANNING UNDER NEW TAX LAWS
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LEGISLATION PENDING TO ALLOW LIFETIME TAX-FREE TRANSFERS OF IRA FUNDS FOR CHARITABLE PURPOSES

As of this writing, there is legislation pending passage in Congress that will provide a new, tax-wise way to use an IRA during lifetime for significant philanthropic and financial planning advantages. The Senate has already passed the CARE Act of 2003 by a vote of 95-5. The House version of the CARE Act has been introduced by Representatives Blunt (R-MO) and Ford (D-TN). It is called the Charitable Giving Act of 2003 (H. R. 7) and was passed by the House on September 17.

Under current law, an individual cannot withdraw funds from an IRA without recognizing the distribution as a taxable event subject to income taxes as ordinary income. Even if an individual desires to distribute the IRA funds to a charitable organization, income taxes must be paid on the IRA funds donated to charity with a corresponding income tax charitable deduction. However, under the tax laws, one can only deduct up to 50% of adjusted gross income for charitable gifts of cash, and there is a ceiling on the amount of itemized deductions that can be claimed on one’s tax return. Thus, it is usually inefficient tax planning to transfer IRA funds to charity during one’s lifetime.

If the new law is enacted, an individual will be able to withdraw and transfer funds from an IRA to make a gift directly to a charity or to establish a split-interest charitable gift (e.g., a charitable gift annuity, a charitable remainder trust or an interest in a pooled income fund) as set out in the legislation without paying taxes on the withdrawn funds. If the individual’s funds are in another type of qualified plan, there must be a transfer first to a rollover IRA before the gift is made to charity or to a charitable split-interest vehicle. A withdrawal from an IRA or rollover IRA for one or all of these purposes will not be considered a taxable event provided the individual is over the threshold age specified in the new law which, as of this writing, is 70½.

On September 10, the House Ways and Means Committee gave its approval to a modified version of H. R. 7, the Charitable Giving Act. The bill was debated and cleared the House on September 17 when it was sent to the Senate to be reconciled with the CARE Act. Unfortunately, the Senate shut down on October 3 for a weeklong fall recess, and lawmakers were not able to reach an agreement to send a charitable giving bill to Conference before they left Washington.

The current status of both bills and the Conference is unclear as of this writing.

The legislation includes the IRA charitable rollover that was part of the original version of H. R. 7. The version would allow donors who have reached age 70½ to make tax-free transfers from their IRA either directly to a charity or to establish a charitable gift annuity, a charitable remainder trust or an interest in a pooled income fund (what are known as split-interest charitable gifts).

It is likely that the effective date for any final compromise between H.R. 7 and S. 476 (the CARE Act) will be 12/31/2003. (Note that the CARE Act (S. 476) previously passed by the Senate, allows these distributions for direct gifts to charities beginning on the day after the date of enactment (the date the legislation is signed into law by the President), but the ability to make distributions to split interest entities would be available after 12/31/2003.)

In the event that the pending legislation is enacted, we will post an updated alert describing how this planning can be implemented and the benefits that may be enjoyed.