Thursday April 25, 2024

3.9.2 Remainder to Charity

Remainder to Charity

Moderate Estate:   With the current estate exemption, many estates are not subject to estate tax.

Taxable Estates Charitable Deduction:   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).

Cost of A Revocable Trust Remainder To Charity:   For a taxable estate, the cost of a charitable transfer is reduced by the top marginal estate tax bracket of the estate.

Moderate Estate

With the current estate exemption, many estates are not subject to estate tax. The revocable trust with the charity as trustee and remainder recipient will be attractive to these persons primarily for two reasons. First, they will benefit from receiving trust services during life. They will be relieved of the obligation and risks of making their own investments. Second, they will be able to benefit their favorite charity when they pass away with any portion of the trust that they do not require during their lifetime.

Taxable Estates Charitable Deduction

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. Estate of Cavett v. Commisioner. 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 Starkey v. United States.

Cost of A Revocable Trust Remainder To Charity

For a taxable estate, the cost of a charitable transfer is reduced by the top marginal estate tax bracket of the estate. For example, when the estate tax bracket is 40%, the cost of most transfers is 100% minus 40% tax savings or 60%. The transfer of a charitable remainder amount of $100,000 in a large estate could save $40,000 in estate tax, with a net cost of $60,000.

Case Studies on Remainder to Charity

Refund Due for Termination of "Single" Status, Part 3 of 3: Steve Reid, 80, retired fifteen years ago after working most of his life as a product manager for a Fortune 500 company. At the age of 78, Steve, a widower, decided to move into a retirement community in south Florida. The retirement community required an entrance fee of $50,000 from all new residents. However, the fee would be refunded over time using an amortized schedule.