Estate Tax Charitable Donation: The Simple Guide

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Paul Sundin, CPA

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Many people understand how charitable donations work for income tax purposes. But charitable donations work a little differently for estate tax purposes. There are three key differences.

The first difference is that the estate tax charitable deduction is allowed for a gift to a foreign charitable organization. But the income tax charitable deduction is only allowed only for donations made to U.S. charities. For this reason, many foreign charitable entities have U.S.-based affiliated organizations. 

Another big difference is that the estate tax charitable donation deduction is unlimited. As such, an estate could essentially gift away its entire gross estate and not owe any estate tax. But for income tax purposes, charitable donations are limited to income (typically 30% to 50%). 

For estate tax purposes, certain pledge payments are treated differently from the income tax requirements. Specifically, the payment of enforceable pledges is treated a little differently. 

A pledge payment that is made during life can typically qualify for an income tax charitable deduction. But for estate tax purposes, payment by will of a legally enforceable pledge will qualify for an estate tax debt deduction. Still, it does not fall under the estate tax charitable deduction.

Another key distinction is that the estate tax donation deduction is allowed just for assets included in the decedent’s gross estate. But for income tax purposes, a taxpayer is allowed to take a deduction for gifting an asset that has not been included in income, such as appreciated stock. 

A charitable donation does not necessariliy have to come from the gross estate. One example of this is assets passing directly to a charity from a trust, such as a non-marital deduction trust created by one’s deceased spouse).

There are some other issues when it comes to the estate tax charitable deduction. One is the rule that the assets passing to charity at the date of death are passing from the decedent. Thus, a will that designates a fixed dollar amount to a qualified charity that the decedent’s executor selects will qualify for an estate tax charitable deduction. However, a provision that allows the executor to determine how much will be contributed will not qualify.

Drafting a charitable provision in a will requires a sophisticated estate attorney. Make sure that you review your estate situation with appropriate tax and legal professionals to make sure you consider all estate issues.

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Estate CPA

Gilbert, AZ