Planning and drafting considerations
The federal estate tax is, in a sense, voluntary, because the estate tax charitable deduction allowed under Internal Revenue Code Section 2055(a) can reduce any taxable estate to zero. On the other hand, relatively few estates are now subject to federal estate tax because of the estate tax exemption of $5 million.1 Yet, even for owners of estates with assets of less than $5 million, the provisions of Section 2055, and the corresponding regulations, can be important. Moreover, for charitable givers, the federal income tax can play an important role in good planning and drafting.
In addition, proper planning and drafting can help avoid non-tax problems with respect to at-death charitable dispositions — such as the interpretation or enforceability of gift agreements as well as various estate administration problems.
When a charity seeks a significant gift commitment from an individual, the charity frequently wants a legally binding pledge from the donor that provides either: (1) the donor's estate, trust or individual retirement account will pay any amount of the commitment not paid during life at the donor's death; or (2) the donor's estate, trust or IRA will pay the full amount of the commitment at the donor's death.
Legally binding pledge
If an individual promises to make a gift to a charity during life, and the promise is legally enforceable as a contract, the promise isn't a debt for federal income tax purposes.2 On the other hand, if the individual subsequently dies without having fully paid his pledge, and the pledge instrument doesn't excuse further obligation to pay, the unpaid balance becomes a debt obligation of the deceased donor's estate and is deductible under IRC Section 2053.3 In other words, legally binding pledges are treated diametrically the opposite for income and estate tax purposes.
What makes a pledge legally enforceable as a contract? State law governing the pledge supplies the answer. Consideration for the donor's promise (or detrimental reliance) is needed in some states but not others.4 In some states, consideration consists of placing the donor's name on a building or endowment fund. Under Florida law, however, for a pledge to be enforceable, the charitable donee must show actual detrimental reliance.5 All pledges should contain a governing law provision to avoid murky questions of enforceability.
In my experience, many charities don't submit decedents' legally binding pledges to the probate court. These charities are therefore barred statutorily, at a certain point in time, from presenting a rightful claim against a donor's estate. If a donor's will or revocable trust doesn't have a “back-up” provision and if the executor is unaware of the pledge, the charity may simply and needlessly lose out.
Donors are also routinely unaware that any third-party payment of a legally binding pledge can cause tax problems for the party making the payment.6 Making a third-party payment from a private foundation (PF) or charitable remainder trust (CRT) violates the self-dealing prohibition of IRC Section 4941, to the detriment of both the third party and the donee charity.7
Donors, their advisors and charities should take all these considerations into account upfront when fashioning a legally binding pledge. Rarely is this done, however, in my experience.
Matter of Raymond P. Wirth8 is an important case that shows how a pledge can become legally enforceable under either common law or a statutory variant and how a legally enforceable pledge may turn into a claim against the pledgor's estate.
Non-legally binding pledge
If an individual dies owing money on a non-legally binding pledge, any payment of the pledge by the donor's executor is voluntary and isn't deductible under either IRC Section 2053 or Section 2055.9 Furthermore, if individual beneficiaries of the estate consent to such a payment, they are, in substance, the makers of the gift. They should receive their shares of the gift amount and then make individual donations so that they leave a paper trail for their own income tax purposes.
Of course, if the donor's will or revocable trust provides for the payment of the balance due on such a pledge, then a deduction under Section 2055 is allowable for the payment, because it's not being made voluntarily by the executor or trustee but rather is being made at the decedent's direction.
Contract to make a will, trust or IRA
An individual may contract to leave a gift at death to a charity via his will, trust or IRA. The individual's promise to do so generally needs to be supported by consideration.10 The promise, if it pertains to a will, also needs to be in a signed writing to satisfy the Statute of Frauds.11 Statute of Frauds aside, it would be folly for the charitable donee not to have a signed memorandum of the contract.
Frequently when such a contract is made, the contract provides that the promised gift shall be reduced by any or certain donations the donor made during his life. In this situation, the donor's attorney needs to weave an appropriate formula clause into the fabric of the will or trust.
If the source of ultimate payment is the donor's IRA (that is, the charity is the designated beneficiary of the IRA), the will or trust and the IRA need to work in harmony to avoid having the donor's estate or trust pay income tax on the IRA proceeds going to charity. The donor's attorney should pay close attention to IRC Sections 642(c)(1) and 691(a)(2), as discussed later.
A rather widespread belief exists in the charitable community that if a donor states in writing simply that his estate is legally bound to pay an amount to a charity (what's called an “estate note”), then the writing will be effective under law to convey assets at his death to that charity. In my view, this belief is false, unless the writing satisfies, under applicable state law, the requirements of a will. Reason: This writing purports to function as a will. It's therefore subject to the relevant state law of wills.
Estate planners should be aware that many charities employ these estate notes, failing to understand how the law of contracts, applicable to legally binding pledges and contracts to make a will, differs from the law of wills.12
It's possible, of course, that a probate court will construe an estate note to be a contract to make a will. This construction is most likely to happen when a decedent received consideration for the promise under the note, such as the naming of a building. But, rather than having to rely on a court's construction, it's far better to fashion the estate note as a contract to make a will in the first place.
If a decedent leaves behind a probate estate and a formerly revocable trust, it's important, especially if the will or trust leaves assets to charity, to remember that the estate and the trust are taxable entities for federal income tax purposes. They're taxed differently from an individual, however.
There are two interesting and important illustrations of these differences. First, if during life an individual gives appreciated property to charity in satisfaction of a legally enforceable pledge, he doesn't realize gain. The reason, as discussed above, is that the pledge isn't a debt for federal income tax purposes.13 On the other hand, a legally binding pledge made by a person who dies not having fully paid the pledge is treated as a debt of his estate for both state and federal income tax purposes.14 This fact is of considerable tax significance.
Second, if an estate or trust uses appreciated property to satisfy a pecuniary obligation, such as a pecuniary charitable legacy, the satisfaction causes the estate or trust to realize income.15 This would be the case for an individual transferor only if the obligation were a debt for federal income tax purposes.
IRC Section 691(a)(2)
Section 691(a)(2) provides that a “transfer” of income in respect of a decedent (IRD) by an estate or trust causes the estate or trust to realize the amount of the IRD as income. For this purpose, a “transfer” is a sale or exchange.
If an individual's will or trust simply leaves an IRD item such as EE bonds to charity, the disposition isn't considered a transfer for purposes of Section 691(a)(2) and the estate or trust realizes no IRD.16 Satisfaction of a pecuniary legacy with an IRD item, such as EE bonds or an IRA, on the other hand, does cause IRD to be realized. Such a disposition is a transfer under Section 691(a)(2),17 because a decedent's legally enforceable pledge is an estate debt.
Section 691(a)(2), IRAs and residuary dispositions
It's common for an individual to die leaving a will, a trust and an IRA. The will pours over into the trust, and the trust is named beneficiary of the IRA. The trust leaves part or all of its residue to charity.
The question is whether the trustee can assign the IRA (or part thereof) to the charity in satisfaction of the residuary gift and thereby avoid having the assigned funds treated as income to the trust. The answer is “yes” — if the trust allows the trustee to satisfy the residuary gift in cash or in kind, without having to make a pro rata distribution of trust assets.18
Now let's suppose a donor dies leaving just a will and an IRA. The will leaves a residuary bequest to charity. The IRA has no designated beneficiary. In this situation, the donor's estate becomes the beneficiary of the IRA. The question now becomes whether the donor's executor can assign part or all of the IRA to the charity in satisfaction of the residuary bequest and thereby avoid having the assigned funds treated as income to the estate. Once again, the answer is “yes” — if the will allows the executor to satisfy the residuary gift in cash or in kind, without having to make a pro rata distribution of estate assets.
Note that if the IRA is assigned to the charity, the IRA doesn't become an “inherited IRA.” Only an individual can be the assignee of an “inherited IRA.”19
Naming a charity as an IRA beneficiary
Naming a qualified charity to receive part or all of an IRA is widely recognized in the estate-planning community as an excellent way to carry out a final charitable objective. There are many fine articles available on the web and elsewhere detailing the advantages (for example, estate and income tax-free distribution to charity) of such an arrangement. Here's just one fine point that's generally overlooked: namely, whether the use of an IRA at death to satisfy the balance owed on a legally binding pledge results in income to the decedent's estate (that is, the IRD distributed directly to charity from the IRA). I believe it does, given that the pledge is a debt of the estate, as discussed above. If the estate has to report the distribution as IRD, the question becomes whether the estate is allowed a corresponding IRC Section 2053 deduction. I believe the estate should be allowed such a deduction, but can't find any case or ruling on point.
The income tax charitable deduction under IRC Section 642(c)(1)
There's only one deduction allowed to a trust or estate for income distributed to charity — the deduction allowed under Section 642(c)(1). It's in lieu of the charitable deduction granted to individuals and corporations under IRC Section 170.20 No distribution deduction is permitted for an estate or trust under IRC Section 661 for income distributed to charity.21
The core requirement for allowance of a Section 642(c)(1) deduction is that the income be distributed to charity pursuant to the terms of the “governing instrument.”22 The governing instrument is the instrument governing the entity (estate or trust) claiming the Section 642(c)(1) deduction.
Applicability of Section 642(c)(1)
Two cases illustrate the applicability of Section 642(c)(1). In the first case, a wife's will exercised a power of appointment, causing assets to flow from her deceased husband's trust into the wife's probate estate. From there, the assets passed to charity under the residuary clause of the wife's will. The trustee of the husband's trust claimed a Section 642(c)(1) charitable deduction with respect to the assets.
The U.S. Court of Appeals for the Second Circuit denied the deduction because the assets didn't pass to charity pursuant to the terms of the governing instrument (the trust).23 It should be noted that the trust instrument granted a power of appointment and if the wife had appointed the assets directly to charity, the “governing instrument” requirement presumably would have been met, and the court would have allowed a Section 642(c)(1) deduction.
In the second case, a decedent's trust left $100,000 to charity. The trust was named a beneficiary of the decedent's IRA, and the trustee assigned a portion of the IRA to charity in satisfaction of the pecuniary legacy. The trustee did this assignment pursuant to a provision allowing him to satisfy the legacy in cash or in kind, without any requirement of pro rata diversification. The assignment was a “transfer” — a sale or exchange — under Section 691(a)(2), which caused the trust to realize $100,000 of ordinary IRD. The question was whether the trust was entitled to an offsetting Section 642(c)(1) deduction. In a Chief Counsel Advice, the Internal Revenue Service denied the deduction because the trust instrument didn't direct the trustee to satisfy the pecuniary legacy out of trust gross income.24 A trustee or executor should always be directed to satisfy pecuniary or residuary charitable legacies first out of trust or estate gross income, unless the donor's attorney has good reason to provide otherwise.
Federal Estate Tax Deduction
There are three basic requirements for allowance of the federal estate tax charitable deduction:
- The assets passing to a qualified charity must be included in the decedent's gross estate and must pass from the decedent;25
- If assets are transferred to charity for both charitable and non-charitable purposes, the amount passing to charity must be ascertainable as of the date of the decedent's death (that is, presently ascertainable);26 and
- If the bequest is conditional, there must be, as of the date of death, only a non-negligible possibility the bequest will fail to satisfy the condition.27
There are other requirements as well — such as those pertaining to disclaimers by which assets pass to charity, which I'll discuss later — but these three requirements generally are at the core of good planning and drafting.
Executor's discretion as to charitable recipient or amount
The decedent's executor (or trustee) may be given discretion not only as to which assets shall be used to satisfy a charitable bequest, but also as to: (1) which qualified charity(ies) shall receive the bequest, or (2) the amount of the bequest. The Section 2055 deduction isn't jeopardized if the discretion goes only to the qualified charitable recipients.28 But the Section 2055 deduction is lost if the discretion goes to the amount of the charitable bequest. For example, in one case, the decedent's will gave the executor discretion to make relatively modest gifts to whichever individuals the executor deemed to have been helpful to the decedent in his final years. The executor made some small gifts and then distributed the residue of the decedent's estate to two universities. The Tax Court denied a Section 2055 deduction with respect to the residue.29 It reasoned that the amount of assets passing to charity wasn't ascertainable as of the date of death and that the assets passed for tax purposes from the executor, not from the decedent.
Testamentary Gift Annuities
An inter vivos gift annuity is a contract between a donor and a charity whereby the charity, in consideration of assets transferred by the donor, agrees to pay a life annuity to one or two persons. A testamentary gift annuity, on the other hand, is created by a conditional bequest. For purposes of this article, the term “testamentary gift annuity” also includes gift annuities set up at death using trust or IRA assets.
Testamentary gift annuities are currently relatively popular among charitable donors, especially as a way to provide for a surviving spouse. Their popularity is due to:
- low interest rates;30
- trust in the particular charity; and
- the fact that all of the charity's assets stand behind the annuity.
All gift annuities — both inter vivos and testamentary — are subject to a thicket of state and federal laws. The annuity must meet the requirements of IRC Section 514(c)(5) so that the obligation to pay the annuity won't create debt financing, be treated as commercial insurance under IRC Section 501(m) and won't be a registrable security under the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(10)(D)(vi)).
Section 514(c)(5) requires that:
- The annuity must be payable for one life or two lives in being when it's created;
- The sole consideration for the assets used to fund the annuity must be the annuity;
- The initial present value (PVA) of the annuity must be less than 90 percent of the value of the assets used to fund the annuity;
- The annuity contract must not provide for a minimum or maximum number of payments;
- The annuity contract must not provide for any adjustment of the annuity payments by reference to any income earned by the charitable payor.
Planning and drafting. Because a testamentary gift annuity is a conditional bequest and because of Section 514(c)(5)'s 90 percent of PVA rule, it's necessary that: (1) as of the date of death, there's a negligible possibility the charity will reject the bequest, and (2) as of the date of death, the PVA can be calculated with certainty. To meet these requirements, I favor an inter vivos letter of intent running from the charity to the donor (and counter-signed by the donor) that:
- lays out the donor's intent to leave a specified amount to the charity for the purpose of establishing an annuity for an individual then living;
- specifies how the annual annuity amount will be calculated and in what periodic installments the annuity will be paid; and
- specifies when, with respect to the date of the donor's death, the first annuity payment shall be made. (I favor the last day of the calendar quarter when the one-year anniversary of the donor's death occurs.)
This letter of intent isn't a contract; it doesn't obligate the donor in any way. In some states, it's not fashioned as a gift annuity contract. For example, the New York Insurance Department doesn't allow unfunded gift annuity contracts. The Insurance Department also insists, under Section 110 of the New York Insurance Law, that all charities issuing gift annuities in New York conform their entire annuity program to New York law. The donor's executor and the charity form the annuity contract according to the letter of intent.
Powers of appointment, disclaimers and post-mortem gift planning
An estate tax charitable deduction is allowed with respect to assets passing to a qualified charity as the result of the decedent's exercise or non-exercise of a general power of appointment — provided the assets comprise a deductible interest.31 An example of a non-deductible interest is a remainder interest in a trust that isn't a qualified CRT under IRC Section 664.32
An estate tax charitable deduction is also allowed with respect to assets passing from a decedent to a qualified charity as the result of a qualified disclaimer, as defined in IRC Section 2518(a).33 Disclaimers are rich with possibilities for post-mortem charitable gift planning, as two private letter rulings illustrate:
Example 1: “Qualified disclaimer” (PLR 200204022 (Oct. 22, 2001))
Some time ago, a wife and husband created a charitable remainder unitrust (CRUT) using jointly held securities. They named themselves to receive the trust payout for life and also named their son and daughter as successor beneficiaries of the payout. They reserved the right, exercisable by will, to revoke the children's interests in the trust. After the wife died, a court ordered that the single CRUT be split into two equal-sized CRUTs. The court designated one of the two as the wife's CRUT, representing her share of the original funding. The son and daughter wanted to make a “qualified disclaimer” (as defined in IRC Section 2518) of their interests in the wife's CRUT and had time to do so. The husband would retain his interest in the wife's CRUT. The IRS blessed the division of the original CRUT and the proposed disclaimer. As a result of the disclaimer, an estate tax marital deduction was allowed for the husband's interest in the wife's CRUT.34
Example 2: Post-mortem gift planning: using a “qualified disclaimer” to help fix an unqualified CRT (PLR 9852034 (Sept. 29, 1998))
A donor's will established a trust to pay all of its net income to the donor's sister for life, remainder to charity. The will allowed the trustee of the trust to make discretionary distributions of principal to the sister for her “care, comfort, health and support.” The trustee wanted to reform this trust, pursuant to IRC Section 2055(e)(3), to be a qualified 7.09 percent CRUT — so that the donor's estate would get an estate tax charitable deduction with respect to the trust. The problem was the sister's right to get principal at the trustee's discretion for care, comfort, health and support. To solve this problem, the sister made a “qualified disclaimer” of her right to receive these discretionary principal distributions. Based on the sister's disclaimer and the trustee's reformation, the IRS concluded that the value of the remainder interest in the trust would be eligible for the federal estate tax charitable deduction under IRC Section 2055(a).
The “qualified reformation” under Section 2055(e)(3) of a defective split-interest gift, such as the trust in PLR 9852034, is yet another valuable post-mortem planning tool. Note that one of the core requirements of Section 2055(e)(3) is that the actuarial value of the “reformable interest” not exceed by more that 5 percent the actuarial value of the “reformed interest.” PLR 9852034 met this requirement by “tuning” the payout rate of the reformed trust (that is, the unitrust) to 7.09 percent.
Not all disclaimers are “disqualified disclaimers.” For example, the Tax Court decided a case in which a testator, Helen, died, leaving her entire estate to her daughter, C. Helen's will provided that any portion of the estate disclaimed by C would pass: (1) in part to Helen's PF, and (2) in part to a charitable lead annuity trust (CLAT) in which C had a remainder interest. C disclaimed all but a $6.35 million portion of Helen's estate. At issue was whether a federal estate tax charitable deduction was allowable with respect to the disclaimed portion of Helen's estate. The Tax Court held that it was allowable as to the portion passing directly to the PF, but not as to the portion passing to the CLAT. Reason: C's disclaimer was not a “qualified disclaimer” under IRC Section 2518 as to the CLAT due to C's remainder interest.35
Settlement of controversies
An amount passing to charity as the result of a legitimate settlement of a will contest can qualify as having passed from the decedent and can qualify for the estate tax charitable deduction.36 Assets passing to charity as the result of the settlement of a controversy involving breach of a pre-nuptial agreement also can qualify for the estate tax charitable deduction.37 A surviving spouse's election against her deceased husband's will, likewise, may result in a charitable, as well as a marital, deduction. In one instance, a husband left his wife a relative pittance and left the residue of his estate to charity. The wife elected against the husband's will and received, as an elective share, a life income interest in a statutorily created trust, the remainder of which was vested in charity. The trust wasn't a CRT as defined in IRC Section 664, but the IRS ruled it could be reformed under Section 2055(e)(3), retroactively to the date of the husband's death, so as to become a qualified CRT.38
Allocation of Taxes and Expenses
Any taxes allocated to assets passing to charity will, dollar-for-dollar, reduce the estate tax charitable deduction allowable with respect to the assets.39
An interesting illustration of this principle involves a decedent whose will allocated estate taxes on probate to her residuary estate without any adjustment as between two residuary beneficiaries, an individual and a charity. This meant the taxes were to be paid off the top of the residue, which would reduce the amount passing to charity, which in turn would reduce the decedent's estate tax charitable deduction. A California state court issued an order, upon petition, that all the estate taxes be allocated to the individual's share of the residuary estate. The Tax Court held that the state court order was ineffective to override the will for federal estate tax purposes.40 In my experience, this costly drafting flaw (if that's what it was) is fairly common.
The Treasury regulations divide estate administration expenses into three categories:
- Management expenses attributable to and taken from the charitable share;
- Management expenses not attributable to the charitable share but taken from the charitable share; and
- Transmission expenses taken from the charitable share.
The “charitable share” is the amount of the decedent's estate with respect to which an estate tax charitable deduction is allowable. It also includes the post-mortem income earned on such assets.41
“Management expenses” are expenses incurred in the investment, preservation or management of estate assets during a reasonable period of administration (for example, brokerage fees and interest).42 To the extent management expenses are attributable to the charitable share, they may be paid from the charitable share without reducing the estate tax charitable deduction.43 Management expenses not attributable to the charitable share that are paid from the charitable share reduce the estate tax charitable deduction.44
“Transmission expenses” paid from the charitable share reduce the estate tax charitable deduction dollar-for-dollar.45 Transmission expenses are expenses that wouldn't have been incurred except for the decedent's death — such as executor commissions and attorney fees (except to the extent they qualify as management expenses), probate fees and appraisal fees.46
Planning and drafting
If a client wishes to leave a portion of his estate to charity and keep taxes on the estate to a minimum, consider allocating transmission expenses and management expenses not attributable to the charitable share to the non-charitable share of the estate — assuming the non-charitable share isn't a marital share. This way, the estate tax charitable deduction won't be diminished, and the expenses so allocated will be deductible under IRC Section 2053. For further tax savings, allocate management expenses attributable to the charitable share to the non-charitable share and deduct them under Section 2053. That way, a Section 2053 deduction is allowed in addition to an undiminished Section 2055 deduction.47
Leaving IRA Assets to a CRUT
Leaving IRA assets to a CRUT as defined in IRC Section 664 is a way to move the assets at death from one tax-exempt entity to another, avoid the minimum distribution rules, possibly gain both charitable and marital deductions and potentially put a useful fence around the assets. If the IRA assets are to be the only funding assets of the trust, the best approach is:
- During life, the donor creates a trust that, in all respects, is a CRUT, except that it's revocable by the donor;
- The donor names himself as a co-trustee, together with, say, the charitable remainder beneficiary as the other co-trustee;
- The donor transfers a nominal amount (for example, $5) to the trust;
- Upon the donor's death, the power of revocation expires and the trust becomes a fully qualified CRUT, and the trust is then in a position to receive the IRA assets.
I prefer this approach because it ensures that, at the moment of the donor's death, there exists an identifiable beneficiary of the IRA. Without the nominal funding, the trust wouldn't exist as a CRUT at the donor's death, because it would have no assets.48
Keeping the trust revocable during the donor's life and making the donor a co-trustee ensures that during the donor's life, no tax return needs to be filed with respect to the trust.49
One important aspect of this arrangement is that any income tax deduction otherwise allowable under IRC Section 691 with respect to federal estate tax on the IRA assets passing to the CRUT is allocated to the trust and offsets “Tier 1” income in the trust, possibly having favorable income tax consequences for the trust payout beneficiary.50
Charitable and Marital Planning
The IRA-funded CRUT is one way to combine charitable and marital deduction planning. Another way, in the case of a non-U.S. citizen spouse, is to fashion a CRT as a qualified domestic trust.51
If a client prefers to leave his spouse with the greatest flexibility in regard to a trust that will provide the spouse with a life income, a qualified terminable interest property (QTIP) trust with a charitable remainder may be preferable to a CRT. The tradeoff here isn't between the charitable and marital deductions, as both are unlimited, but between the tax-exempt status of the CRT and the flexibility that can be built into a QTIP trust. The tax-exempt status of a CRT to be funded at death is generally less significant than one funded during life, given the step-up in basis at death for non-IRD assets.
Framework for Planning
This article aims at providing a framework rather than details — a framework of how to think about pre-mortem planning and drafting and post-mortem planning with respect to at-death charitable dispositions. Some of the many details not covered here, for example, pertain to drafting a will to include a testamentary lead trust or to provide for a bequest of art. These topics, which involve fascinating planning opportunities, are best covered in stand-alone articles, some of which have been published in Trusts & Estates.
- According to the Urban-Brookings Tax Policy Microsimulation Model (version 0509-6) performed in December 2010, the number of taxable estates in 2011 would be: 43,450 with a $1 million estate tax exemption; 6,460 with a $3.5 million estate tax exemption; and 3,600 with a $5 million estate tax exemption. See www.taxpolicycenter.org.
- See, e.g., Private Letter Ruling 8230156 (April 30, 1982).
- Treasury Regulations Section 20.2053-5.
- New York, for example, follows common law regarding the enforceability of charitable pledges. Matter of Raymond P. Wirth, 14 A.D.3d 572 (2005), aff'd, by Decision 2, No. 172 (N.Y. Court of Appeals 2005). In Iowa, on the other hand, a signed written promise to make a charitable gift is enforceable, notwithstanding lack of consideration. Salsbury v. Northwestern Bell, 221 N.W.2d 609 (Iowa Sup. Ct. 1974).
- Mount Sinai Hospital v. Jordan, 290 So.2d 484 (Florida Sup. Ct. 1974).
- See Revenue Ruling 81-110. In this ruling, A made a legally enforceable pledge that B paid. The Internal Revenue Service characterized B's payment as a transfer (gift) to A, and ruled that A, not B, was entitled to claim a federal income tax charitable deduction for the payment.
- See Treas. Regs. Section 53.4941(d)-2(f)(2). Also see PLR 9714010 (Dec. 20, 1996) regarding payment of a legally binding pledge with the remainder in a charitable remainder trust (CRT) (not permissible).
- Matter of Raymond P. Wirth, supra note 4.
- The reason is that the payment is voluntary and at the executor's discretion. See Estate of Jack H. Levin, T.C. Memo. 1995-81. If non-charitable beneficiaries of the estate consent to the payment, they may be considered donors for federal income tax purposes, but I've found no case or ruling on point.
- The requirement of consideration is common contract law. A Pennsylvania statute, however, provides that any signed written promise by which the promisor states an intention to be legally bound is legally enforceable notwithstanding lack of consideration. Pa Stat. Ann. title 33, Section 6.
- See, e.g., Cal. Civ. Code Section 1624(e); N.Y. Gen. Oblig. Law Section 5-701(1).
- The law of contracts aims basically at protecting reasonable expectations. The law of wills, on the other hand, because of its strong emphasis on thwarting frauds, often has frustrated expectations that individuals, while living, may have considered quite reasonable.
- Rev. Rul. 55-410.
- Treas. Regs. Section 20.2053-5; Matter of Raymond P. Wirth, supra note 4.
- If, for example, a charitable remainder annuity trust or unitrust makes a distribution of appreciated assets in satisfaction of the annuity or unitrust payout, the distribution is treated as a sale or exchange of the asset. Treas. Regs. Section 1.664-1(d))(5). As to an estate or trust using in-kind distributions to satisfy a pecuniary obligation being treated generally as a sale or exchange, see Treas. Regs. Section 1.661(a)-2(f).
- See, e.g., PLR 9845026 (Aug. 11, 1998) (no income realized when an executor used EE bonds to form part of the residuary estate to satisfy residual charitable bequest).
- Chief Counsel Advice 200644020 (Dec. 15, 2005).
- See, e.g., PLRs 200526010 (March 22, 2005) and 200537019 (May 25, 2005).
- IRC Section 408(d)(3)(C)(ii).
- Treas. Regs. Section 1.642(c)-1(a)(1).
- Treas. Regs. Section 1.663(a)-2; Estate of O'Connor, 69 T.C. 165 (1977).
- Internal Revenue Code Section 642(c)(1); Treas. Regs. Section 642(c)-1.
- Brownstone v. United States., 465 F.3d 525 (2d Cir. 2006).
- CCA 200644020 (Dec. 15, 2005).
- Treas. Regs. Section 2055-1(a).
- Treas. Regs. Section 2055-2(a).
- Treas. Regs. Section 2055-2(b). In Technical Advice Memorandum 9443001, an estate tax charitable deduction was disallowed on these grounds with respect to a charitable devise of real estate subject to certain use and development restrictions. But the IRS said a charitable bequest subject to a possibility of reverter might be deductible, given that local (Maryland) law cut off possibilities of reverter after 30 years. T.A.M.9443004.
- Rev. Rul. 69-285.
- Estate of David N. Marine, 97 T.C. 368 (1991).
- Most charities that issue gift annuities adhere to the payment rates recommended by the American Council on Gift Annuities. As of the publication of this article, the recommended payment rate for an annuity issued to a 78 year old, for example, is 7 percent.
- Treas. Regs. Section 20.2055-2(d) essentially provides this rule.
- Rev. Rul. 76-504.
- Treas. Regs. Section 20.2055-2(c).
- An estate tax marital deduction is allowed with respect to a surviving spouse's interest in a charitable remainder trust (CRT) only if he's the only non-charitable payout beneficiary of the trust. IRC Section 2056(b)(8).
- Estate of Helen Christiansen, 130 T.C. No. 1 (2008).
- See, e.g., PLR 200127038 (April 10, 2001 ) and Estate of Gilbert, 4 T.C. 1006 (1945).
- PLR 9845015 (Aug. 7, 1998).
- PLR 200541038 (June 22, 2005).
- Treas. Regs. Section 20.2055-3(a).
- Estate of Miriam G. McKay, T. C. Memo. 1994-362.
- Treas. Regs. Section 20.2055-3(b)(1)(iii).
- Treas. Regs. Section 20.2055-3(b)(1)(i).
- Treas. Regs. Section 20.2055-3(b)(3).
- Treas. Regs. Section 20.2055-3(b)(4).
- Treas. Regs. Section 20.2055-3(b)(2).
- Treas. Regs. Section 20.2055-3(b)(1)(ii).
- If an IRC Section 2053 deduction is claimed with respect to management expenses attributable to the charitable share, the estate tax charitable deduction is reduced by the amount so claimed. Treas. Regs. Section 20.2055-3(b)(3).
- A CRT doesn't come into existence until the trustee first receives assets. Treas. Regs. Section 1.664-1(a)(4).
- Treas. Regs. Section 1.671-4(b).
- See PLR 199901023 (Oct. 8, 1998). As to the tier structure of taxing CRT trust payouts, see IRC Section 664(c). The first tier (Tier 1) is ordinary income, which is the first amount deemed to be distributed.
- In PLR 9845015 (Aug. 7, 1998), a CRT that met the requirements of a qualified domestic trust was created pursuant to a settlement agreement between decedent's executor and decedent's wife, arising out of decedent's breach of a pre-nuptial agreement.
Jonathan Tidd is an attorney in Connecticut who represents many charitable organizations