Statement of Troy Bryant Yopp, Jr., Former Chairman of the Board of Governors,
Shreveport Hospital of Shriners Hospitals for Children,
Shreveport, Louisiana, on behalf of Shriners Hospitals for Children, Tampa, Florida

Testimony Before the Subcommittee on Human Resources and
Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means

Hearing on H.R. 7, the "Community Solutions Act of 2001"

June 14, 2001

My name is Troy Bryant Yopp, Jr. I'm the former Chairman of the Board of Governors of the Shreveport Hospital of Shriners Hospitals for Children. It is a privilege and an honor to appear before you today on behalf of Shriners Hospitals for Children.

Shriners Hospitals for Children is the largest charity hospital system in the United States and one of the largest charities in the United States. Our first hospital was opened in 1922 in our hometown, Mr. Chairman, of Shreveport, Louisiana. Today, the twenty-two (22) Shriners hospitals provide excellent medical care to children without regard to race, religion, or relationship to a Shriner. All care at Shriners Hospitals is provided totally without charge. Shriners Hospitals have treated hundreds of thousands of children free of charge, accepting no government funds, and no insurance nor parental reimbursement for the care provided.

Combining quality medical care, progressive research and innovative teaching programs, Shriners Hospitals are at the forefront of orthopaedic and burn care. Since 1922, Shriners Hospitals have provided care to over 625,000 children.

We're very proud of this achievement. It would not have been possible without the many charitable contributions we have been so fortunate to receive over the years. Voluntary private philanthropy enables us to continue this record of service. It is for this reason that I am here before you today to encourage Congress to enact legislation that would make it possible for donors to contribute funds from their IRAs without tax penalty to Shriners Hospitals.

Any development officer at a hospital, university, or church will tell you that life-income gifts are an extremely important part of philanthropy. Life-income gifts make major gifts possible because these kinds of gifts allow the donor to "have his cake and eat it, too." The donor retains an income interest while giving capital to a qualified Internal Revenue Code § 501(c)(3) organization.

I'd like to take a few minutes to give you an overview of how life-income gifts work.

The charitable remainder trust ("CRT"), pooled income fund ("PIF"), and charitable gift annuity ("CGA") are called "life-income" or "split interest" gifts because they combine a retained income stream with a gift of capital or "remainder" to charity.

The CRT was authorized by the Tax Reform Act of 1969. It is governed by Internal Revenue Code § 664 and well-established Treasury Regulations. These trusts for over three decades have been widely used to provide secure retirement incomes for many thousands of philanthropically minded taxpayers. The donor can be the trustee of the CRT as well as the income beneficiary.

A CRT can be either a charitable remainder annuity trust ("CRAT") or charitable remainder unitrust (CRUT). As the name implies, the CRAT pays the donor (or the donor and spouse) an annuity. The donor establishes both the amount and frequency of payments, in accordance with Treasury regulations. If net income is insufficient to pay the predetermined amount, the trustee will invade corpus to make up any shortfall. Only after the expiration of the life income interest are the assets in the trust disbursed to the charity selected by the donor.

The CRUT operates in the same manner as the CRAT, with one important difference: when the donor creates a CRUT, he or she sets a pay-out rate which is a fraction of the annual value of the trust assets. The pay-out will vary depending on the value of the assets (determined annually). This makes the CRUT a hedge against inflation. There are several planning options unique to the CRUT. For example, the donor may direct that principal is to be invaded to make up any deficiency in income or may elect an "income only with make up" format. As with the CRAT, only upon the expiration of the beneficiary's (or beneficiaries') interest will the remaining assets be distributed to the charity selected by the donor.

The pooled income fund is authorized by Internal Revenue Code § 442. It functions as a "common fund" CRT. It is administered by the charity (or its designee, usually a bank). The donor contributes money or qualified securities to the PIF, which pays the donor (and his or her spouse) income which depends on the ratio of contribution to the total of assets in the fund and its investment performance. As the term "pooled" implies, many donors contribute to one PIF, which pays to each a secure income. An advantage of the PIF is diversification combined with professional asset management. Our pooled income fund pays approximately 6.46%.

The charitable gift annuity is not a trust. It is a contract between the charity and donor. In return for a contribution (which exceeds the cost of a comparable commercial annuity), the charity promises to pay an annuity at a preset rate. The gift element consists of an amount which is actuarially determined to be in excess of what is needed to fund the payments to the donor. Joint and survivor (husband and wife) charitable gift annuities are often used in retirement income planning. Virtually every major charity in the United States issues charitable gift annuities.

Individual Retirement Accounts are a great potential source of support for charities. According to the Joint Committee on Taxation, it is estimated there are more than $1 trillion in IRA accounts.

Although incomes and wealth have increased sharply over the past decade, charitable giving has not kept pace. The rate of growth (3.2%) in charitable giving in 2000 was the lowest in the past five years, according to Giving USA, which is published by the American Association of Fund Raising Counsel.

Tax incentives encourage contributions to IRAs. However, tax disincentives discourage contributions from IRAs to charities, even though many persons, including thousands of self-employed professionals, have IRA assets well in excess of what is needed for a secure retirement.

I'd like to explain what these disincentives are and how they can be removed.

The taxpayer may withdraw funds from an IRA without penalty after age 59 ½, but must commence withdrawal in the April following the year in which he or she attains age 70 ½.

Under current law, an IRA withdrawal is taxable as ordinary income- even if the funds are used to make a charitable contribution. We have found this to be quite discouraging to individuals who want to make a gift of IRA assets to Shriners Hospitals. Under the best of circumstances, the tax may be offset by the charitable deduction, but not always- because of "percentage limits" and "itemized deductions reduction".

For donations of cash or "ordinary income property", the charitable contribution deduction may not exceed 50% of an individual's adjusted gross income ("AGI"). To the extent a taxpayer has not exceeded the 50% limit, contributions of capital gain property generally may be deducted up to 30% of AGI. If a contribution exceeds these "percentage limits", the "excess" may be carried forward and deducted during the next five years. The result is there often will not be a complete "offset", which means the taxpayer will owe tax, despite having made a significant charitable contribution of IRA assets.

In addition to these "percentage limits", Internal Revenue Code § 68 requires the taxpayer to reduce most itemized deductions (including charitable contribution deductions) if he or she has adjusted gross income in excess of a threshold amount (indexed for inflation). For the taxpayer in this situation, the total of itemized deductions is reduced by 3% of AGI over the threshold, but not by more than 80% of itemized deductions subject to the limit. This reduction may prevent the taxpayer from fully utilizing the charitable contribution deduction arising from his or her gift of IRA assets.

The net result can be a tax liability, even though a charitable contribution is made. This is a serious obstacle to even the most generous potential donor.

The legislation we support would remove these disincentives to philanthropy. The legislation would enable the donor, commencing at age 59 ½, without penalty to "roll over" IRA assets, either as an outright gift or to a qualified life-income gift vehicle. The donor would not be subject to tax at the time of withdrawal and transfer, but also would receive no tax deduction. No charitable contribution deduction would be allowed. All income from the life-income gift would be subject to tax at ordinary income tax rates.

If the donor has saved in an IRA more than what is needed for a secure retirement, he or she would have the opportunity without incurring a tax penalty to make a charitable contribution from IRA assets. If this option were available, we believe many persons would take advantage of this opportunity, instead of deferring IRA distributions until age 70 ½ and then taking out only the annual minimum required by law. This is what many upper-income taxpayers now do.

Permitting tax-free roll-overs, commencing at age 59 ½, to life-income charitable gifts will encourage earlier distributions, which also means earlier taxation. It is because of this earlier taxation that the revenue loss estimated by the JCT is small.

The JCT, by letter dated April 12, 2001 to Representative Jennifer Dunn, provided an estimate of the revenue effect of the legislation. The JCT concluded that allowing tax-free withdrawals from IRAs for charitable purposes would result in a total revenue loss of $3.3 billion for fiscal years 2002 through 2011.

We are aware there are certain differences between IRA-to-charity rollover legislation. The "narrower" version of the IRA-to-charity rollover legislation provides for a direct "roll over" to charity (but not to a life-income gift vehicle) at age 70 ½. The "broader" version of the legislation, which we support, provides for the rollover either to the charity directly or to life-income charitable gifts beginning at age 59 ½.

According to revenue loss studies by the JCT the difference in revenue loss between the two versions is only approximately $700 million over ten years.

The best way to encourage charitable giving is to provide the philanthropically inclined individual with as many options as possible. Direct gifts to charity are an appealing option, but indirect giving through split-interest gifts is equally, if not more so. This is because the use of split-interest gifts more explicitly accommodates charitable giving with the need to ensure an income stream for life to the donor. It also enables the donor to capture the psychological aspects of giving to one's favorite charity in a way gifts at death cannot. Permitting tax-free rollovers to split-interest gifts provides taxpayers with a tested and well-regulated option that reconciles retirement security and charitable giving to the benefit of the donor and the taxpayer.

Shriners Hospitals believes that the proposed legislation will provide much needed support for major gifts to charities at a modest cost to the Treasury. In actuality, there likely would be no cost. The enhanced ability of charities, funded by IRA rollover gifts, will relieve the federal government of expenditures which otherwise would be needed to provide health care and similar services.

The present opportunity is truly a "win-win" situation for charities, the Treasury, and the American people. This is why we so strongly support this legislation.