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Charities reap aid, confusion from new federal law: Pension Protection Act opens new avenues for giving

September 4, 2006

A new law signed last month by President Bush should open the valves to a fresh stream of charitable giving by allowing people to make tax-free donations from their IRAs for the first time.

But philanthropy insiders say that, while the law gave, it also hath taken away.

The Pension Protection Act encourages contributions from individual retirement accounts, but it crimps the use of popular donor-advised funds, which allow donors to maintain some control over how their contributions are spent.

The act also promises some bureaucratic snarls for private foundations and supporting organizations, public charities formed to support a specific not-for-profit like a hospital or university.

"Our private foundations are calling and saying, 'Can we give these funds?' and our supporting organizations are saying, 'This isn't going to stop funds, is it?'" said Indianapolis attorney Marilee Springer, senior counsel at Ice Miller, which represents about 30 private foundations.

The charitable provisions-seven that encourage giving and 17 that guard against abuses-were added to legislation intended to ensure that businesses adequately fund their employee pension plans. They came about after a years-long effort by Sen. Charles Grassley, R-Iowa, to clean up what he has called a "cesspool" of philanthropic abuses.

Allowing charitable IRA rollovers is one of the biggest incentives. Through 2007, donors age 70-1/2 or older can take up to $100,000 out of their retirement accounts without penalty if the money goes directly to charity.

"It's a wonderful added benefit for donors to be charitable with another portion of their assets," said Rob MacPherson, vice president for development at the Central Indiana Community Foundation.

Indeed, people who don't want to take money out of their regular investments might be more inclined to take it out of their IRAs, said Mark Pflum, president of the St. Francis Healthcare Foundation, a supporting organization for St. Francis Hospital and Health Centers.

However, that benefit has limitations. These IRA donations cannot be made to supporting organizations like Pflum's, to private foundations or donor-advised funds.

That's a large portion of the charitable pie to carve out. As much as $15 billion is held in donor-advised funds across the country, said Luis Maldonado of the Washington, D.C.-based Council on Foundations, which represents 2,000 grant-makers nationwide.

In Indianapolis, donor-advised funds make up a majority of the Central Indiana Community Foundation's assets-$300 million of the $560 million the public charity holds.

"Our business is growing significantly because of the interest in and demand for donor-advised funds," he said.

MacPherson added that the IRA allowance represents "a big upswing for us, [but] it just didn't go as far as we would have liked it to go."

Leaving supporting organizations out of the IRA bonanza means Joe College will have to give his unused retirement money directly to his alma mater instead of the foundation that supports it.

That could hamper scholarship development at public institutions, where it becomes tougher to restrict donations so narrowly. It also places money directly in the college or university instead of the foundations that are better equipped to handle it.

"We find that regrettable because it puts the college in the position of doing things they don't normally do, but we're going to work with them and help them through that," said Chuck Harris, vice president of development at Ivy Tech Community College of Indiana.

At the same time it encourages giving through the IRA contributions, Congress also boosts accountability for donor-advised funds and supporting organizations.

"This legislation really is attempting to ferret out or find situations where the donors are exerting too much control over the funds they're contributing," Springer said.

Critics have said donor-advised funds are ripe for abuse because they operate without many of the restrictions that govern private foundations. In extreme cases, the funds have been used to benefit donors, rather than charities.

The law slaps a penalty tax on any payment made from a donor-advised fund to a donor, adviser or related party.

Additionally, it discourages private foundations from making grants to socalled "Type III" supporting organizations, charities with loose ties to the notfor-profits they support. Such entities often have just one board member in common with the parent institution, something that can make them more prone to abuse.

For instance, donors might offer a huge chunk of money to one of these organizations on the condition that they receive some influence in who winds up on its board.

Under the new law, foundations that give to Type III organizations could be taxed on those gifts, and the donations would not count toward foundations' annual payout requirements.

Sound complicated? It gets worse.

"I don't think anyone has even remotely correct information on how many Type III supporting organizations we have in Indiana and what their grants look like from foundations," Springer said.

Since the average foundation doesn't know one type of supporting organization from another, some might avoid giving to them at all.

She also noted that these restrictions became effective the day the law was signed, which puts many charities in awkward positions. Those that operate on a calendar-year basis are deep into their grant cycles, and some supporting organizations might have already received donation letters.

The act offers a variety of dates. While some provisions started last month, others are retroactive to January.

"There's a whole different set of application dates, and that's one of the biggest issues we're trying to get our hands on in the short term," Maldonado said.

Long-term concerns focus on that IRA contribution. The council will lobby Congress to include entities like donor-advised funds or supporting organizations.

"We're convinced that [the restrictions] will limit philanthropy," Maldonado said.
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