Americans in general are a charitable
lot. Millions of Americans annually donate to community, religious, civic and
athletic organizations that operate as charitable organizations. There is an
immediate tax benefit to this, the charitable deduction the donor can take on
their annual tax return during one's lifetime. Conversely, even at one’s passing, there is a tax
benefit to donating to charity, namely a deduction on their estate tax. The
following are some questions that provide a broad overview of the topic.
1. What is the charitable deduction in
the context of the estate tax?
Federal law allows a U.S. citizen or
resident of the United State to leave some or all of their estate to a
qualified charitable organization which will reduce their estate tax liability.
IRC §2055(a).
For example Danny Decedent was a resident
of Campbell, CA. At the time of his passing in 2011, Danny had earned a vast
fortune because he was an early investor in Google, namely $12M. Danny was
concerned about paying Uncle Sam millions of dollars in estate taxes at his
death, as the tax rate for estates larger than $5M was 35%. IRC §2010(c). Danny
had engaged in philanthropic endeavors during his life and wanted to benefit
these charities rather than have his money be sent to Washington D.C.
Therefore, Danny decided to leave his entire estate to two California-based
charities, HealthCare Volunteer and CACS Government Research, via his will.
Editor’s Note: The person is fictionialized
while the charities are authentic.
2. What types of charities are eligible
beneficiaries?
Federal law says the following charities
are eligible: (1) The United States, any state, any political subdivision
thereof, or the District of Columbia, but only if the contribution is used for
exclusively public purposes, (2) IRC §501(c)(3) organizations established in
nonprofit corporation form, (3) IRC §501(c)(3) organizations established in
charitable trust form, (4) various veterans' organizations or (5) employee
stock ownership plans subject to certain conditions. IRC §2055(a).
(2) and (3) are the most common
beneficiaries for reference. For example, thousands of people have left money
to their university or graduate school which falls under the category of (2)
and (3).
3. What happens if a donor receives
something in return for the donation?
When a donor receives something in
exchange for their donation, a quid pro quo basically, the value of the goods
or services generally offsets the value of the contribution for tax purposes. Treas
Reg §1.170A. For instance, assume a late donor gives $100,000 to their beloved
alma mater, San Diego State University for example, and SDSU replies by giving
the late donor’s grand niece an athletic scholarship worth $40,000. Generally
speaking, the donor’s estate could only claim a $60,000 charitable deduction on
the estate tax return. (IRS Form 706 for those curious).
4. Is there a limit on the charitable
deduction for estate tax purposes?
Federal law does not limit the estate
tax charitable contribution deduction that can be claimed. IRC §2055. Thus, a
person is free to leave their estate to a charity to avoid paying any estate
tax. For instance, noted multi-billionaire Bill Gates may leave his entire
estate, something in the range of $56B, to a charitable organization to avoid
the estate tax.
5. Is it common to leave an estate to charity?
From my experience, few clients leave their
estate to charity. In particular, the select few who do leave money to charity
usually allocate a small fraction of their estate to charity rather than their
entire estate. Individuals who leave vast amounts to charities are often the
very wealthy who face an estate tax issue. This should by no means dissuade
anybody from thinking about giving to charity. It is just that many parents
have a sense of obligation to provide for their children. In contrast, the very
wealthy do not really have that concern because their children are taken care
of already. Hence, the former often leaves their estate to their spouse and
children whereas the latter leaves it charity typically.
6. Are there trusts for this?
Yes, there are trusts specifically
designed to achieve a charitable estate tax deduction. Examples of these
include a charitable lead trust and a charitable remainder trust.
