Charitable bequests by the wealthy are often made not only to carry out a philanthropic objective but also to save taxes and maybe also to achieve some other purpose. For example, wealthy individuals often leave wealth to a private family foundation both to avoid estate taxes and to provide downstream heirs who sit on the foundation board with the opportunity to learn about philanthropy.
The federal estate tax generally allows for an unlimited charitable deduction, which in a sense makes the federal estate tax voluntary. To the writer’s knowledge, states that impose an estate or inheritance tax also allow unlimited “death tax” charitable deductions.
But the federal estate tax charitable deduction can be lost through faulty planning. Some examples:
The charitable deduction is allowed for leaving a specified amount to qualified charities to be selected by the donor’s executor but not for allowing the executor to determine how much shall go to charity.
The charitable deduction can be lost if the bequest to a charity is so restricted that there’s a real possibility, as of the date of death, that the charity will reject the bequest. Even if down the road the charity’s board votes to accept the bequest as restricted.
The charitable deduction can be lost when the bequest is to a trust intended to be a charitable remainder trust (CRT) if the language creating the trust fails to meet the requirements of a CRT.
These are just a few of many examples that could be given. Which means the lawyer who drafts the donor’s will should know at least the basics of the estate tax charitable deduction.
Something important to know about the estate tax charitable deduction is that it’s not subject to some of the major rules applicable to the income tax charitable deduction. These major rules include [a] the rules requiring a “qualified appraisal”; [b] the rules applicable to gift receipts for lifetime donations; and [c] the unrelated use rule, which applies to lifetime donations of tangible personal property.
We’ll continue drilling down into the important subject of charitable bequests next time.
By Jon Tidd, Esq