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Posted March 24th, 2017

Let’s Take a Look at the Estate Tax Charitable Deduction

Estate tax returnThe estate tax charitable deduction is different from the income tax charitable deduction in several important ways.

First, the estate tax charitable deduction is allowed for a gift (bequest) to a foreign charity, such as a university in England. The income tax charitable deduction is allowed only for gifts to U.S. charities. That’s why some foreign charities have U.S. “Friends of” charitable affiliates.

Second, the estate tax charitable deduction is unlimited for qualified gifts (bequests). This makes the federal estate tax, in a sense, voluntary. The federal income tax charitable deduction is, of course, subject to various limitations. The income tax can’t be “voluntary”; it raises too much of the federal revenue (around 95%); the estate tax raises only about 1% – 2% of the federal revenue.

Third, the estate tax handles certain pledge payments differently from the income tax, specifically the payment of enforceable pledges. Any pledge payment made during life can qualify, generally speaking, for a federal income tax charitable deduction. On the other hand, payment by will of a legally enforceable pledge qualifies for an estate tax debt deduction, not an estate tax charitable deduction. The estate tax debt deduction is perfectly fine, however.

Fourth, the estate tax charitable deduction is allowed only for assets included in the “gross estate.” On the other hand, one can get an income tax charitable deduction for giving an asset not included in income (e.g., appreciated stock). What is an example of assets passing to charity at one’s death that is not included in one’s gross estate? One such example is assets passing to charity from certain types of trusts (e.g., a non-marital deduction trust created by one’s deceased spouse).

There are some other twists and turns to the estate tax charitable deduction. One, for instance, is the requirement that the assets passing to charity at death pass from the decedent. Thus, a will provision that leaves $X to qualified charities to be selected by the decedent’s executor does qualify for an estate tax charitable deduction, while a will provision that allows the executor to determine how much shall pass to charity does not.

Drafting a charitable provision for a will can require sophisticated tax-related knowledge on the drafting lawyer’s part. That’s one of several reasons why it can be good for a charity to get a peek at such a provision while the donor is living.

by Jon Tidd

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