Charitable Contributions: An Analysis of Estates' and Trusts' Responsibilities
CPA Journal, The › Vol. 74 Nbr. 8, August 2004
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Summary
Estates and trusts entail a unique form of property ownership: Even though legal ownership is held by an entity, equitable ownership belongs to the beneficiaries. These beneficiaries may be present or future recipients of income or principal. This scenario provides the backdrop for the income tax framework created by IRC subchapter J. Because an estate or trust can be either a pass-through or tax-paying entity, the income tax deductibility of estates and trusts' charitable contributions can be ambiguous. Subchapter J requires that contributions be made from income, and made from income proportionately where the governing instrument provides no direction. The 100% deducibility afforded when the contribution vehicle is a trust or estate may be lost. Avoiding a negative result requires that the document provide that contributions be sourced from taxable income.
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Charitable Contributions: An Analysis of Estates' and Trusts' Responsibilities
Estates and trusts entail a unique form of property ownership: Even though legal ownership is held by an entity, equitable ownership belongs to the beneficiaries. These beneficiaries may be present or future recipients of income or principal. This scenario provides the backdrop for the income tax framework created by IRC subchapter J. Because an estate or trust can be either a pass-through or tax-paying entity, the income tax deductibility of estates and trusts' charitable contributions can be ambiguous.
BackgroundAn executor or trustee has the fiduciary duty of administering property in accordance with the testator's/grantor's wishes as expressed in the governing document. As such, if the controlling instrument is silent as to charitable contributions, making a contribution would constitute a breach of fiduciary duty. Only contributions directed by the will or trust document are allowed, as established by Riggs National Bank of Washington D.C. v. United States [(173 Ct. Cl. 478 (1965)] and Sid Richardson Foundation v. United States [430 F.2d 710 (5th Cr., 1970)]. The source of permitted contributions provides direction as to the proper tax treatment. Generally, contributions from principal, or corpus, are bequests to charitable organizations governed by IRC section 2055 and the estate tax regulations. The charitable bequest serves to reduce the gross estate in arriving at the amount subject to estate taxes on Form 706. On the other hand, contributions on a Form 1041 return serve as income tax deductions and are gover...See the full content of this document
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