The Wall Street Journal recently published this article by Kelly Greene that publicizes the technique of using charitable donations to offset the taxes incurred when you convert a traditional IRA to a Roth IRA.  The charitable donations are often made to a donor advised fund or a charitable trust.

2010 is a popular year to do a Roth IRA conversion because this year has fewer restrictions on who could do a conversion.  In January I was part of panel presentation for insurance advisors on the risks and benefits of converting to a Roth IRA.  One of the risks is that  converting to a Roth IRA incurs taxes that had been dormant in the traditional IRA.   By making charitable donations you can offset those taxes through the charitable deduction.  If you make the donation by way of a charitable remainder trust ("CRT"), you can offset the income taxes this year, allow the charity to receive the donation in the future, and use current income from the trust to either fund your lifestyle or purchase life insurance to provide your children with the same value as the assets you gave to the charity. 

This is a good estate planning technique because traditional IRAs have a double tax problem when you die.  They are calculated as part of your estate in determining any estate taxes owed AND they have the dormant income taxes that must be paid if your heirs want to take distributions from the IRA.  If you leave a Roth IRA to your heirs, they don't have the income tax "gotcha" that comes with traditional IRAs.  If you also have a charitable remainder trust that you used to fund life insurance (also in a trust) you can remove both the assets in the charitable trust and the assets in the life insurance trust from your taxable estate.

I have had several clients convert to Roth IRAs already this year, but they usually work with their accountants on that rather than talking to me.  I'll have to work to get the word out that people should talk to their lawyer along with their accountant about ways to minimize the taxes on a Roth conversion.  I'll start with this blog post.