Discussion:Charitable Beneficiary and 1041 Deduction
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Discussion Forum Index --> Tax Questions --> Charitable Beneficiary and 1041 Deduction
| 1 July 2007 | |
| I have an estate valued at 1.4 million. There are 8 beneficiaries, one of which is a charitable organization. No 706 Estate Tax return was required since the estate was below 2 million in value. The Estate has Total Income of 110,000. The charitable organization is to receive 18% of the Estate (all assests + income). Since the distribution to the charitable organization will exceed $250,000, can I claim $110,000 (the total income) as a charitable deduction, or am I limited to 18% ($19,800), the charity's proportionate share of the income? I recognize that I cannot claim the full $250,000, since that exceeds the income of the Estate and is partially from principal. However, I am confused regarding the allowable deduction for the charitable beneficiary distribution. I hope someone can help clarify for me. Thank you | |
| 1 July 2007 | |
| Can't comment on Texas law, so I don't know what is required or available to you. In NY we would have sought court approval to distribute to the charity in an earlier fiscal year than the other beneficiaries. Your circumstance seems to limit you to the 18%. In any event, the principal distributed to the charity is never going to qualify for a deduction. | |
| 1 July 2007 | |
| Thank you, Dennis. I was thinking my deduction would be limited. However, I have not made any distribution yet. And, the date of death was 4/10/07. So, I will consult with the attorney to see if I have the option to distribute to the Charity this year and delay the others. Although, I don't think the other beneficiaries would be pleased with me if I delayed. Sometimes, other demands can overrule the tax benefits. I appreciate the help. | |
| 1 July 2007 | |
| The best you can ever do in this type of situation is to try and give the non-charity beneficiaries the lion's share of the deduction for administrative expense. I apologize for not making this more clear. The amount either paid or reserved for charity has to come from income and the charity's share on the income is always going to be 18%. Do note that state law will tell you to what extent the expenses are charged to income and principal. The deduction under §642 is based on accounting income. | |
| 2 July 2007 | |
| I agree with Dennis - at best 18% of the income IF the will said "pay from current income". If the will just said "18% to charity" and didn't specifically say "pay from current income" then NO charitable deduction on the 1041. | |
| 2 July 2007 | |
| Dennis and Kevinh5, Thank you so much for the follow-up. The will says: " I direct that all of my assets, real, personal, and mixed be sold and/or converted to cash and be distributed as follows". Then it lists the 8 beneficiaries and their respective shares, one of those being the Charitable organization, whose share is 18%. The biggest portion of taxable income is from an annuity. The Estate was named as the beneficiary of the annuity. I also have interest income and tax-free municipal income, but the annuity is what gave me the big taxable income issue.
It would seem that since the distributions retain their character when passed on to the beneficiaries, that I would be allowed a deduction for the portion of the distribution to the charity that represents their share of the gross taxable income. I have read the Sec. 642, and it is very confusing. I appreciate your advice. | |
| 2 July 2007 | |
| 1) I don't see how you could claim a charitable deduction for ANY of the income with this wording - perhaps state law may interpret it differently. Perhaps state law would deem these to be separate shares? May need an attorney to answer that question according to the law of the decedent's domiliciary state..
2) It sounds like the bequests were pecuniary bequests, so if that is the case, you could pass out 18% to the charity and get an IDD deduction. (but still no charitable deduction) | |
| 2 July 2007 | |
| Oh dear. Most definitely not a pecuniary bequest. Designation as a residual beneficiary always includes the right to the income that residual earns during administration. What you do want to check out, however, is whether the executor has the authority under the will to satisfy the charity's share with all or part of the annuity. If so, the charity gets all of the IRD attributable to the distribution. See PLR 200633009 as an example. | |
| 2 July 2007 | |
| But Dennis, even if the charity gets the income, is it a charitable deduction on the 1041 or an IDD on the 1041? | |
| 2 July 2007 | |
| The IRS has rather consistently defined IRD as gross income qualifying under §642. Unidentified PLR from GiftLaw Pro
Note that the treatment is not allowed for a pecuniary bequest. Memorandum 200644020 | |
| 2 July 2007 | |
| And it doesn't work for a specific bequest (deemed paid out of corpus) either. So only if the charity is a residuary beneficiary would the estate get a charitable deduction? | |
| 2 July 2007 | |
| Dennis & Kevinh5, the will states that " Any authorized distributions may be made to or for the benefit of the beneficiary, directly to the beneficiary, on behalf of the beneficiary, in any form or annuity, or in all ways provided by laws dealing with gifts or distributions". I have received and deposited the annuity in the Estate account, but I have not made any distributions to any beneficiaries.
I spoke with the IRS, and they stated that there would be no charitable deduction allowed because the will did not specifically state that the distribution to the charity should come from Estate income. Too late now, but if the annuity had been payable to the Charity, or if the will had specified the distribution to the charity should come from the annuity, I believe I could have avoided the IRD from the annuity passing to the Estate and/or non-charitable beneficiaries. | |
| 2 July 2007 | |
| Read the Memorandum link provided by Dennis. I think it says otherwise. | |
| 2 July 2007 | |
| Kevinh5, it looks like you are correct. I don't think there is any way to avoid the tax on the annuity. But, it looks like there will be a substantial tax savings if the beneficiaries pay the tax rather than the Estate.
Dennis & Kevinh5, great information. I appreciate your help. | |
| 2 July 2007 | |
| I think you get the 18%. Note that if tax is paid at the estate level and then funds are distributed per will the charity's share will be reduced. | |
| 2 July 2007 | |
| Yes, and some of the other beneficiaries' shares would be reduced because they are in low tax brackets. I estimated that the tax paid at the Estate level would be approximately 38,000, but, if paid by the beneficiaries, the tax would be substantially less. The Charity would owe no tax. I think it could save as much as 15-20,000 in overall tax if I make distributions this year and pass the income to the beneficiaries' K-1's. | |
| 2 July 2007 | |
| You miss my point. Paying tax at the estate level was not a recommendation, but an illustration to demonstrate that the charity is in effect paying tax -- an unacceptable result. Thus the applicability of in the §642 deduction. | |
| 2 July 2007 | |
| Dennis, I guess the light bulb finally came on. I did miss your point on the section 642 deduction. Thank you. That does make sense. You have been extremely helpful. | |
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