Thursday March 28, 2024

1.3.3 Charitable Estate Deductions

Charitable Estate Deductions

Bequests of Cash or Property:   A full charitable deduction is permitted for a bequest of cash or property to a charity.

Administrative Expenses:  Administrative expenses in an estate may be deducted as estate administration expenses or as expenses appropriately related to the production of income on the estate Form 1041.

QTIP/Bequest:   If the decedent creates a qualified terminable interest property (QTIP) trust for the surviving spouse, there will be a marital deduction.

Charitable Remainder Trust or Charitable Lead Trust:   With a qualified charitable remainder trust or lead trust, there is a deduction for the value of the charitable interest.

CRT Estate Inclusion:   The estate inclusion for a CRT created during the life of the donor depends on the income recipient of the trust.

Income in Respect of a Decedent:   Various types of assets in an estate constitute income in respect of a decedent.

Bequests of Cash or Property

A full charitable deduction is permitted for a bequest of cash or property to a charity. Sec. 2055(a). The transfer to charity may be through a specific bequest of a particular asset or a percentage of the whole estate or of the residue. It is essential that the designation be made to a qualified exempt charity. A deduction limited to specific charitable purposes – as opposed to specific charities – may be honored, but if the language is indefinite, the Service may deny the deduction on the grounds that the distribution is not exclusively for the benefit of a qualified charitable purpose. Bequests to foreign charities are also permissible, so long as the use of the asset is limited exclusively to charitable purposes.

Administrative Expenses

Administrative expenses of an estate may be deducted as estate administration expenses or as expenses appropriately related to the production of income on the estate Form 1041. New regulations by the service create two categories of expenses. The first category is management expenses, which relate to the management of property and would be incurred whether or not the asset is transferred to an estate. These will not reduce a charitable estate deduction. The second category is transmission expenses. The transmission expenses will reduce the charitable deduction and are defined as those expenses that occur as a result of the creation of an estate. Reg. 20.2055-1(d).

QTIP/Bequest

If the decedent creates a qualified terminable interest property (QTIP) trust for the surviving spouse, there will be a marital deduction. Since the remainder is transferred by the will or trust of the first decedent, it is possible to benefit from a charitable deduction in the second estate by transferring the QTIP remainder to charity. While there is full inclusion of the QTIP trust in the second estate, there is an offsetting charitable deduction. Reg. 20.2056(b)-7(a).

Charitable Remainder Trust or Charitable Lead Trust

With a qualified charitable remainder trust or lead trust, there is a deduction for the value of the charitable interest. The charitable remainder annuity trust or unitrust interest will be valued and this value taken as a charitable deduction. Sec. 664(a). For a charitable lead annuity trust or lead unitrust, the present value of the income stream is a deduction for estate tax purposes. Reg. 20.2055-2(d).

CRT Estate Inclusion


The estate inclusion for a CRT created during the life of the donor depends on the income recipient of the trust:

- If the donor is the sole recipient of the CRT, the value of the CRT is included in the donor's estate, but there is a charitable estate tax deduction for the value of the remainder interest at the donor's death.

- If the donor's spouse is the sole surviving recipient of the CRT, the value of the CRT is included in the donor's estate, but there is a marital deduction for the value of the income interest and a charitable deduction for the value of the remainder interest.

- If the donor's spouse and other individuals are the surviving recipients of the CRT income, the value of the CRT is included in the donor's estate. There is no marital deduction allowed, but the value of the remainder interest will create a charitable estate tax deduction.

- If the CRT recipient is not a spouse, the CRT is not included in the donor's estate unless the donor retained a testamentary power of revocation. If a testamentary power of revocation was held at death, the CRT will be included in the donor's estate but will create a charitable estate tax deduction for the remainder interest.

There are different outcomes also for testamentary CRTs. For CRTs created as a testamentary trust:

- If the spouse is the sole recipient, the value of the CRT is included in the donor's estate, but it is entirely covered by the martial deduction and charitable deduction.

- If the spouse and other individuals are recipients, the value of the CRT is included in the donor's estate. The marital deduction does not apply, but there is a charitable deduction for the remainder interest.

- If the CRT recipient is not a spouse, the value of the CRT is included in the donor's estate and there will be a charitable estate tax deduction for the value of the remainder interest.

Qualified Personal Residence Trust (QPRT). Generally, a QPRT is subject to inclusion in the decedent's estate if the decedent retains a life interest. If a donor creates a QPRT for the use of a home for the lesser of a term of years or until donor's prior death and dies prior to the expiration of the term of years, the home is included at fair market value on date of death. If the decedent lives longer than the term of the QPRT, the value of the property is not included in the decedent's estate.

Income in Respect of a Decedent

Various types of assets in an estate constitute income in respect of a decedent (IRD). Assets that would require recognition of ordinary income upon receipt by a beneficiary are generally termed IRD assets. The most common types of IRD assets are traditional IRAs and pension plans. However, commercial annuities, U.S. Savings Bonds, unqualified deferred compensation, stock options and other assets could also constitute IRD assets.

An excellent strategy is to bequeath the IRD asset to charity. If the IRD assets are transferred to family members, the assets could potentially be subject to both estate tax and income tax. By transferring the IRD asset to charity, there is a full charitable estate tax deduction. Reg. 20.2055-1(a). Since the receipt of IRD does not produce unrelated business taxable income for the charity, there is also an avoidance or bypass of the income tax otherwise payable on the IRD asset.

Case Studies on Charitable Estate Deductions

Death and Taxes - The Madison Era of Giving, Part 7 of 7:   A legend in the business world and a recent star in the planned giving world, George Madison, Jr., truly represented the American spirit at its best. Sadly, George passed away in his sleep last month at the age of 80. He leaves behind his wonderful wife of 60 years, his three children, his eight grandchildren, his two faithful dogs and an estate valued at approximately $100 million.

Private Letter Rulings

TAM 199925043 Estate Deduction for Gift Benefiting Foreign Charity:   Many foreign charities have U.S. affiliates. The donor in this ruling left a $1,000,000 bequest, with no clear direction whether the bequest was to the U.S. charity or the foreign charity. Clearly, the bequest to the U.S. charity would be deductible under Sec. 2055. The foreign bequest might not be deductible even for estate tax purposes, since the "proof of charitable use" standard for the foreign charity might not be met.

PLR 200013015 QTIP Trust Divided Between Surviving Spouse and Charity:   The estate of decedent was divided into three portions - consisting of an outright gift to spouse with the balance to Trust A and Trust B. Trust B was a QTIP trust with income to the surviving spouse and, at the discretion of trustees, principal could be invaded for her benefit. After the spouse passes away, Trust B will be distributed to a school and a specific charity. The portion for the school had been previously funded through a charitable remainder of Trust B trust and, thus, the entire remainder of Trust B was to be distributed to the specific charity.

PLR 200019011 Foreign Charity Qualifies for Estate Charitable Deduction:   Decedent had selected six charitable organizations for the residuum of her estate. The will explicitly specified that to qualify for the bequest, the "charity" must be "an organization described in Sec. 2055(a) of the Internal Revenue Code of 1986." If the charity did not qualify, the bequest would lapse.

PLR 200026010 Estate Trust Qualifies for Charitable Deduction:   The residuum from the estate of decedent, who passed away on Date 1, was allocated to a charitable trust. On Date 2, the trust was determined by the IRS to be an organization described in Sec. 509(a)(3). These organizations are commonly called "supporting organizations" and are exempt because they are "operated, supervised or controlled by or in connection with" a public charity. The supporting organization may be either a trust or a corporation. In this case, the supporting organization was a trust.

PLR 200032010 Estate Compromise Rescues Charitable Tax Deduction:   Prior to his death, the decedent created a trust. The provisions of his will allocated several specific bequests and then transferred the residue of his estate to the trust. This trust made distributions to 11 charities, including Charity A.

PLR 200105059 Reformation of Trust Qualifies for Estate Tax Charitable Deduction:   Decedent created a trust during his lifetime, which at his death would transfer a portion of its assets to Trust A. Trust A would then to provide income to six individuals for 10 years and subsequently benefit seven charities. Grantor died and the estate sought to obtain an estate tax charitable deduction. However, Trust A as written did not qualify for a deduction under Sec. 2055.

PLR 200116007 Transfer of Restricted Land to Private Foundation Still Qualifies Estate for Deduction:   Taxpayer owned a land estate and other substantial assets. Taxpayer desired that at his death the land estate be used as a public museum and garden operating exclusively for charitable and educational purposes. He thus during his lifetime created a private foundation (PF) whose exempt purpose was to preserve and maintain the land for future public use.

PLR 200120002 Transfer of Land to Private Foundation Qualifies Estate for Charitable Deduction:   Taxpayer owned a land estate and other substantial assets. Taxpayer desired that at his death the land estate be used as a public museum and garden operating exclusively for charitable and educational purposes. He thus during his lifetime created a private foundation (PF) whose exempt purpose was to preserve and maintain the land for future public use.

TAM 200128005 Settlement Payments Entitle Estate to a Charitable Deduction:   Taxpayer created a trust that, after his death, would benefit his wife and cousin for a period of years. When the trust terminated, the proceeds of the trust would pass to another trust to benefit a cemetery where Taxpayer's family was buried.

PLR 200252077 Payments to Charity Pursuant to a Settlement are Deductible from Gross Estate:   Taxpayer created a trust that would benefit 10 beneficiaries at his death. Taxpayer later amended the trust to benefit the 10 original beneficiaries and an eleventh beneficiary, a charity. Taxpayer subsequently died and Taxpayer's family challenged the trust amendment on the grounds of undue influence.

PLR 200425027 Scrivener's Error Defense Saves Estate Tax Charitable Deduction:   Dominic Donor created Dominic's Trust to receive his retirement assets and the residue of his estate at his death. Dominic's Trust was designed to make distributions to Foundation, a Sec. 501(c)(3) organization, to fund Dominic's Memorial Fund at Foundation. Foundation will then distribute amounts from Dominic's Memorial Fund to other educational and charitable institutions. Dominic's attorney stated by affidavit that due to a drafting error, he failed to include the language necessary so that the assets transferred to Dominic's Trust would qualify for the federal estate tax charitable deduction. On this basis, state court granted a petition to reform Dominic's Trust to include the required language. The executor of Dominic's estate sought a ruling that an estate tax charitable deduction would be allowed for the value of assets transferred to the reformed trust.

TAM 200437032 No Estate Deduction with "Vow of Poverty" Heir:   In TAM 200437032, the Service determined that a bequest to a member of a religious order would not qualify for a charitable deduction, even though the member was under a vow of poverty.

PLR 200505008 Charitable "No Contest" Plan Approved:   Decedent's revocable trust creates three "Gift Trusts." After his or her death, the three Gift Trusts will primarily benefit specified charities. However, the transfer to each Gift Trust is contingent upon several requirements. First, each Gift Trust must have a trustee, and it may not have been funded during life or terminated during life.

PLR 200537019 IRD Includible in Decedent's Estate, but not Taxable:   Decedent's will provided gifts of cash and personal property to certain named individuals. The residue of the estate was to be divided equally among 10 named charitable organizations. The will granted the executor the power to make distributions or divisions of the estate in cash or in kind. The executor was also granted the power to give different kinds or disproportionate shares of property or undivided interests in the estate property to the named beneficiaries.

PLR 200605001 Dividing a Testamentary Trust into Chaitable and Non-Charitable Trusts produces an Estate Tax Charitable Deduction:   Trust was created by Decedent upon his death. Trust was to pay income to Son's trust for Son's benefit until Son's death. At Son's death, the remainder was to be distributed as follows.


PLR 200626021 Extension to File an Election to Deduct Charitable Contributions in Previous Tax Years is Approved:   B created Trust and subsequently died. Trust was to make certain bequests to charities upon B's demise. In year 1, after B's death, the trustee of Trust claimed a charitable income tax deduction based on amounts set aside for charitable gifts.

TAM 200840008 Property Distributed to Trust Doesn't Qualify Estate for Charitable Deduction:   D's will directed the funding of a testamentary trust with the residue of D's estate. The trustees were to divide half of the trust's net income between A and B for their lives and to distribute the remainder at the trustees' discretion. The will provided that after A and B passed away, the trustees could distribute the remaining trust assets to a charity or charities of their choice.


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