Wednesday April 24, 2024
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3.2.2 Estate Tax Deductions
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Estate Tax Deductions
Bequest to Domestic or Foreign Charity: Transfers from a taxable estate will qualify for an estate tax charitable deduction, so long as they benefit a qualified exempt charity or the entity is "operated exclusively for religious, charitable, scientific, literary or educational purposes."
Cost of a Bequest to Charity: For a taxable estate, the cost of a charitable bequest is reduced by the top marginal estate tax bracket of the estate.
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Bequest to Domestic or Foreign Charity
Transfers from a taxable estate will qualify for an estate tax charitable deduction, so long as they benefit a qualified exempt charity or the entity is "operated exclusively for religious, charitable, scientific, literary or educational purposes." Sec. 2055(a)(2). In addition to the domestic qualified exempt charities listed in IRS Pub. 78, foreign charities may also qualify for an estate tax (but not an income tax) charitable deduction. The foreign gift must expressly limit the use to the "exclusively charitable" purposes listed above. Reg. 20.2055-1(a)(4). See also Rev. Rul. 74-523.
In order to receive a deduction, the right of the charity must be vested. In a case in which the estate was nearly $2 million and a relatively modest sum was distributed to a beneficiary under a discretionary power to allocate principal, the transfer of approximately 90% of the estate to charities did not qualify for a charitable deduction. Since the trust permitted an unlimited invasion of corpus, the interest to the charities was contingent and thus not qualified for a charitable deduction. Even an attempt to reform the document under Sec. 2055(e)(3) was not deemed sufficient. Cynthia Harbison, et al. v. United States.
Deductions may qualify for transfers to fraternal organizations. Sec. 2055(a)(3). However, the transfer must be limited to "exclusively charitable" purposes. Cavett v. Commissioner.
In addition, precision in drafting is important. A bequest to "missionaries preaching the gospel of Christ" was permitted, but only because of the demonstrated long-term intent of the testator that defined the organization to receive the funds. Estate of Kenneth E. Starkey v. United States.
Cost of a Bequest to Charity
For a taxable estate, the cost of a charitable bequest is reduced by the top marginal estate tax bracket of the estate. For example, when the estate tax bracket was 40%, the cost of bequests in taxable estates was 100% minus 40% tax savings, or 60%. For example, a bequest of $100,000 in a large estate could save $40,000 in estate tax, with a net cost of $60,000.
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Case Studies on Estate Tax Deductions
The Philandering Philanthropist, Part 3 of 4:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
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Private Letter Rulings
PLR
200202032 Bequest of Artwork to Museum Qualifies for Charitable Estate Tax Deduction:
Taxpayer owns a collection of artwork, which consists of 53 paintings, drawings and watercolors of various artists during a particular period in time. Taxpayer has previously transferred a 50% undivided interest in 32 of the artworks to Museum and owns a 100% interest in the remaining 21 works of art. Pursuant to Taxpayer's will, Taxpayer bequeaths all of his remaining interests in the 53 pieces of artwork to Museum.
PLR
200322013 Estate Residue to Charitable Trust Qualifies for Estate Tax Deduction:
Tom Taxpayer's will states that the residuary estate bears the burden of any expenses, debts and taxes with respect to Tom's estate. Tom's will further states that the remaining residuary estate distributes to Tom's revocable trust at his death. The trust will be tax exempt under Sec. 501(c)(3).
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
200825014 Settlement Agreement Distribution Qualifies for Deduction:
Decedent's last will and testament directed his entire estate to Trust. Trust provided income to be paid to Charity 1 for 30 years with the remainder divided equally between Charity 1 and Charity 2.
PLR
200905015 Foreign City and Museum Bequests Qualify for Estate Tax Deductions:
Decedent (D), a U.S. citizen domiciled in the U.S. at date of death, bequeathed $x "to be used for charitable purposes" to City, a municipality of a Foreign Country. D also bequeathed paintings to Museum, a department of the municipal government of City, where is it located.
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