Bequest Language
A charitable bequest must conform to IRS rules to qualify for an estate tax charitable deduction. The IRS rules are listed in both the Internal Revenue Code and an accompanying regulation. Under IRC Sec. 2055(a), "The value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises and transfers (to qualified charitable organizations)."
Be aware that charitable bequest language which fails to comply with IRS rules can jeopardize the estate tax charitable deduction, even if a gift actually goes to the charity. The following are examples of language that does not qualify for the deduction.
1. Unascertainable Amount of Charitable BequestBy failing to specify an amount to be bequeathed to a charitable organization, the charitable transfer is actually accomplished by a third party (e.g. the executor), rather than the decedent as required under IRS rules.
2. Unascertainable Charitable BeneficiarySuppose a bequest includes this language, "To Mary, to be distributed to whatever charity she deems worthy." Recalling IRS rules, one would assume such a charitable transfer would fail to qualify for an estate tax charitable deduction because a third party (Mary), rather than the decedent would make the charitable transfer. However, such bequests do qualify for an estate tax deduction provided that (as defined under local law):
The third party is holding the property as a trustee; andThe third party has an obligation to transfer the property to charitable organizations eligible for the IRC Sec. 2055 deduction [Rev. Rul. 69-285, 1969-1 C.B. 222].
3. Conditional BequestsBequest language is conditional or contingent if the charitable transfer relies upon the nonoccurence or occurrence of some event. The insertion of a conditional or contingent bequest will not jeopardize an estate's charitable deduction as long as the possibility that the charity will not receive the charitable bequest is "so remote as to be negligible when it is determined on the decedent's date of death" [Reg. Sec. 20.2055-2(b)(1)].
4. Split-interest BequestsA split-interest bequest is a bequest shared between both charitable and non-charitable recipients. Split-interest bequests only qualify for an estate tax charitable deduction if created in one of the following forms:/ An undivided portion of the decedent's entire interest in property/ A remainder interest in a personal residence or farm (not required to be transferred by trust)/ A remainder interest in a charitable remainder unitrust, charitable remainder annuity trust, or a pooled income fund/ A guaranteed annuity interest or unitrust interest in a charitable lead trust
5. Bequests to Nonqualified Charitable OrganizationsIRS rules require a charitable bequest be made to a qualified charitable organization to qualify for an estate tax charitable deduction. The list of qualified charitable organizations, as set out under IRC Sec. 2055, mirrors the list of qualified charitable organizations under both income tax and gift tax rules. However, slight variations exist. Unlike with income tax rules, nonprofit cemetery corporations are not considered to be qualified organizations under estate tax rules. Additionally, charitable beneficiaries are not required to be domestic corporations under estate tax rules. Finally, charitable bequests to foreign countries only qualify for an estate tax charitable deduction if the bequest is limited to exclusively charitable purposes (with the exception of similar bequests made by nonresident aliens).
6. Bequests to IndividualsAn estate will not qualify for an estate tax charitable deduction made to an individual doing charitable works, rather than the actual qualified charitable organization.For example, an estate oftentimes will bequeath property to a missionary, which does not qualify the estate for a charitable deduction on the transfer. However, the courts have made certain exceptions.
Be aware that charitable bequest language which fails to comply with IRS rules can jeopardize the estate tax charitable deduction, even if a gift actually goes to the charity. The following are examples of language that does not qualify for the deduction.
1. Unascertainable Amount of Charitable BequestBy failing to specify an amount to be bequeathed to a charitable organization, the charitable transfer is actually accomplished by a third party (e.g. the executor), rather than the decedent as required under IRS rules.
2. Unascertainable Charitable BeneficiarySuppose a bequest includes this language, "To Mary, to be distributed to whatever charity she deems worthy." Recalling IRS rules, one would assume such a charitable transfer would fail to qualify for an estate tax charitable deduction because a third party (Mary), rather than the decedent would make the charitable transfer. However, such bequests do qualify for an estate tax deduction provided that (as defined under local law):
The third party is holding the property as a trustee; andThe third party has an obligation to transfer the property to charitable organizations eligible for the IRC Sec. 2055 deduction [Rev. Rul. 69-285, 1969-1 C.B. 222].
3. Conditional BequestsBequest language is conditional or contingent if the charitable transfer relies upon the nonoccurence or occurrence of some event. The insertion of a conditional or contingent bequest will not jeopardize an estate's charitable deduction as long as the possibility that the charity will not receive the charitable bequest is "so remote as to be negligible when it is determined on the decedent's date of death" [Reg. Sec. 20.2055-2(b)(1)].
4. Split-interest BequestsA split-interest bequest is a bequest shared between both charitable and non-charitable recipients. Split-interest bequests only qualify for an estate tax charitable deduction if created in one of the following forms:/ An undivided portion of the decedent's entire interest in property/ A remainder interest in a personal residence or farm (not required to be transferred by trust)/ A remainder interest in a charitable remainder unitrust, charitable remainder annuity trust, or a pooled income fund/ A guaranteed annuity interest or unitrust interest in a charitable lead trust
5. Bequests to Nonqualified Charitable OrganizationsIRS rules require a charitable bequest be made to a qualified charitable organization to qualify for an estate tax charitable deduction. The list of qualified charitable organizations, as set out under IRC Sec. 2055, mirrors the list of qualified charitable organizations under both income tax and gift tax rules. However, slight variations exist. Unlike with income tax rules, nonprofit cemetery corporations are not considered to be qualified organizations under estate tax rules. Additionally, charitable beneficiaries are not required to be domestic corporations under estate tax rules. Finally, charitable bequests to foreign countries only qualify for an estate tax charitable deduction if the bequest is limited to exclusively charitable purposes (with the exception of similar bequests made by nonresident aliens).
6. Bequests to IndividualsAn estate will not qualify for an estate tax charitable deduction made to an individual doing charitable works, rather than the actual qualified charitable organization.For example, an estate oftentimes will bequeath property to a missionary, which does not qualify the estate for a charitable deduction on the transfer. However, the courts have made certain exceptions.
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