Appropriate Bequest Property
Just about any type of property can be used to make a charitable bequest (although charities may not accept some types of property.) Certain types of property, however, are uniquely appropriate for charitable bequests.
Tangible Personal PropertyTangible personal property (e.g., artwork, collectibles, antiques, etc.) may be given to a charity by bequest. Bequests of tangible personal property qualify for the estate tax charitable deduction for the current full appraised value without regard to whether the charity puts the property to a "related use" as is required for the income tax charitable deduction.
Ordinary Income PropertyOrdinary income property (e.g., artwork or a copyright by the original artist or author) given by bequest is also deductible at the current full appraised value for purposes of the estate tax charitable deduction. The reduction of the deemed amount of the contribution to cost basis required for the income tax charitable deduction does not apply for estate tax purposes.
Depressed Value PropertySince heirs cannot benefit from a step-up in basis with depressed property, property that has experienced a loss in value may be particularly appropriate for a charitable bequest. This is in sharp contrast to appreciated property. Here's why: Heirs benefit greatly when they receive appreciated property because appreciated property enjoys a step-up in basis (to the value on the date of the donor's death or the alternate valuation date). As such, when choosing between appreciated property and property that is depressed in value, bequests of appreciated property may be more appropriate for heirs than they are for charity.
Income in Respect of a Decedent (IRD)Income in Respect of a Decedent (IRD) property is also appropriate for a charitable bequest. IRD is inherited property that would have been taxable income to the decedent if the decedent had received it before death.
If a will designates IRD assets for charitable bequest, the estate receives both an estate tax charitable deduction as well as an income tax charitable deduction. Other non-IRD assets are better to bequeath to non-charitable heirs.
Examples of IRD include: / The final salary check prior to death / U.S. savings bonds / Qualified retirement plans / Traditional IRAs / Deferred compensation / Accounts receivable Of all of these assets, U.S. savings bonds, retirement plans, and IRAs represent the most significant potential for charitable gifts due to the immense wealth invested in these assets. Some important strategies must be considered for each.
U.S. Savings BondsU.S. savings bonds must be specifically bequeathed to charity in order to escape the deferred income tax. A general charitable bequest satisfied by these bonds at the discretion of an executor or trustee of the estate will not escape the income tax liability.
The IRS has announced that Series E United States Savings Bonds are to be valued at their redemption price for estate tax purposes, without allowing discounts for lack of marketability or income tax liability [TAM 200303010]. Individuals may be more inclined to bequeath these bonds to a charitable organization because the bequest qualifies for an estate tax charitable deduction at the bond’s redemption value. Otherwise, the value of the bondswithout the benefit of a valuation discount would increase the size of the taxable estate.
Qualified Retirement PlansQualified retirement plans include defined benefit, 401(k), money-purchase, profit sharing and Employee Stock Ownership plans. Other arrangements such as nonqualified deferred compensation, 403(b) annuities, 457(b) plans, traditional and Roth IRAs are also sources of wealth for many people. There are effective ways to make charitable bequests of these assets:
1. The owner can designate a charity as the "named beneficiary" of a retirement plan arrangement. This designation controls the distribution of the assets (instructions left in a will or trust have no effect if the estate or trust is not the named beneficiary of the retirement asset). The plan or account administrator will have a beneficiary designation form for the owner to complete. This is the straightforward way to do it.2. The owner can designate the estate or a trust as the named beneficiary of a retirement plan arrangement and include language within the will or trust that permits the executor or trustee to make income distributions and effectively claim the income estate tax charitable deduction for the IRD-plagued asset that goes to charity.
Tangible Personal PropertyTangible personal property (e.g., artwork, collectibles, antiques, etc.) may be given to a charity by bequest. Bequests of tangible personal property qualify for the estate tax charitable deduction for the current full appraised value without regard to whether the charity puts the property to a "related use" as is required for the income tax charitable deduction.
Ordinary Income PropertyOrdinary income property (e.g., artwork or a copyright by the original artist or author) given by bequest is also deductible at the current full appraised value for purposes of the estate tax charitable deduction. The reduction of the deemed amount of the contribution to cost basis required for the income tax charitable deduction does not apply for estate tax purposes.
Depressed Value PropertySince heirs cannot benefit from a step-up in basis with depressed property, property that has experienced a loss in value may be particularly appropriate for a charitable bequest. This is in sharp contrast to appreciated property. Here's why: Heirs benefit greatly when they receive appreciated property because appreciated property enjoys a step-up in basis (to the value on the date of the donor's death or the alternate valuation date). As such, when choosing between appreciated property and property that is depressed in value, bequests of appreciated property may be more appropriate for heirs than they are for charity.
Income in Respect of a Decedent (IRD)Income in Respect of a Decedent (IRD) property is also appropriate for a charitable bequest. IRD is inherited property that would have been taxable income to the decedent if the decedent had received it before death.
If a will designates IRD assets for charitable bequest, the estate receives both an estate tax charitable deduction as well as an income tax charitable deduction. Other non-IRD assets are better to bequeath to non-charitable heirs.
Examples of IRD include: / The final salary check prior to death / U.S. savings bonds / Qualified retirement plans / Traditional IRAs / Deferred compensation / Accounts receivable Of all of these assets, U.S. savings bonds, retirement plans, and IRAs represent the most significant potential for charitable gifts due to the immense wealth invested in these assets. Some important strategies must be considered for each.
U.S. Savings BondsU.S. savings bonds must be specifically bequeathed to charity in order to escape the deferred income tax. A general charitable bequest satisfied by these bonds at the discretion of an executor or trustee of the estate will not escape the income tax liability.
The IRS has announced that Series E United States Savings Bonds are to be valued at their redemption price for estate tax purposes, without allowing discounts for lack of marketability or income tax liability [TAM 200303010]. Individuals may be more inclined to bequeath these bonds to a charitable organization because the bequest qualifies for an estate tax charitable deduction at the bond’s redemption value. Otherwise, the value of the bondswithout the benefit of a valuation discount would increase the size of the taxable estate.
Qualified Retirement PlansQualified retirement plans include defined benefit, 401(k), money-purchase, profit sharing and Employee Stock Ownership plans. Other arrangements such as nonqualified deferred compensation, 403(b) annuities, 457(b) plans, traditional and Roth IRAs are also sources of wealth for many people. There are effective ways to make charitable bequests of these assets:
1. The owner can designate a charity as the "named beneficiary" of a retirement plan arrangement. This designation controls the distribution of the assets (instructions left in a will or trust have no effect if the estate or trust is not the named beneficiary of the retirement asset). The plan or account administrator will have a beneficiary designation form for the owner to complete. This is the straightforward way to do it.2. The owner can designate the estate or a trust as the named beneficiary of a retirement plan arrangement and include language within the will or trust that permits the executor or trustee to make income distributions and effectively claim the income estate tax charitable deduction for the IRD-plagued asset that goes to charity.
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