Charitable Bequests and Estate Taxes
Charitable bequests do not qualify for an income tax charitable deduction because they are revocable. They do, however, qualify for an estate tax charitable deduction.The importance of the estate tax charitable deduction can be illustrated by a simplified example:
WITH CHARITABLE BEQUEST:Total assets: $20,000,000Charitable bequest: $4,000,000Total estate: $16,000,000Estate tax exemption (2023): $12,920,000 ($5,113,800 equivalent tax credit)Estate tax prior to credit: $6,400,000Estate taxes: $1,286,200Total to heirs: $14,713,800 WITHOUT CHARITABLE BEQUEST:Total assets: $20,000,000Total estate: $20,000,000Estate tax exemption (2023): $12,920,000 ($5,113,800 equivalent tax credit)Estate tax prior to credit: $8,000,000Estate taxes: $2,886,200Total to heirs: $17,113,800
Reduction in estate tax* due to bequest: $1,600,000*The estate tax rate is 40% in 2023.
Unlimited Deduction for Bequests to Qualified OrganizationsThe primary tax advantage for a gift by bequest is an unlimited estate tax charitable deduction, so long as the gift is directed to a qualified charitable organization as defined in the Internal Revenue Code.
Bequests From DonorTo be estate tax deductible, a bequest to charity must pass to charity by direction from the decedent (donor) and not be directed to charity by another heir from his/her personal funds received by bequest from the donor.
No Percentage LimitationsThe estate tax charitable deduction is not subject to overall percentage limitations similar to those that may affect the income tax charitable deduction. Thus, if a person left his/her entire net estate to charity, it would be fully deductible regardless of the size of the net estate.
Payment of Taxes and Other Estate Administration CostsThe donor may provide by the terms of the will that the charitable bequest not be reduced by the payment of estate taxes or other estate administration expenses. In fact, such a provision should be encouraged to preserve the gift and the donor's estate tax charitable deduction. If taxes or other costs are paid from the bequest to charity, the deductible amount will have to be reduced to the extent it is invaded to pay taxes and other costs.
Using Bequests to Satisfy a Lifetime PledgeIf an executor uses estate funds to satisfy or complete a lifetime charitable pledge by the decedent, the transfer does not entitle the estate to an estate tax charitable deduction. However, the payment of the pledge may be deductible as a claim against the estate.
Note: The donor may specifically provide a bequest to charity to fulfill a lifetime gift pledge and qualify for the unlimited estate tax charitable deduction. For example, the will could be revised each year (using an amendment to the will called a codicil) to reflect the current balance owed on the pledge.
WITH CHARITABLE BEQUEST:Total assets: $20,000,000Charitable bequest: $4,000,000Total estate: $16,000,000Estate tax exemption (2023): $12,920,000 ($5,113,800 equivalent tax credit)Estate tax prior to credit: $6,400,000Estate taxes: $1,286,200Total to heirs: $14,713,800 WITHOUT CHARITABLE BEQUEST:Total assets: $20,000,000Total estate: $20,000,000Estate tax exemption (2023): $12,920,000 ($5,113,800 equivalent tax credit)Estate tax prior to credit: $8,000,000Estate taxes: $2,886,200Total to heirs: $17,113,800
Reduction in estate tax* due to bequest: $1,600,000*The estate tax rate is 40% in 2023.
Unlimited Deduction for Bequests to Qualified OrganizationsThe primary tax advantage for a gift by bequest is an unlimited estate tax charitable deduction, so long as the gift is directed to a qualified charitable organization as defined in the Internal Revenue Code.
Bequests From DonorTo be estate tax deductible, a bequest to charity must pass to charity by direction from the decedent (donor) and not be directed to charity by another heir from his/her personal funds received by bequest from the donor.
No Percentage LimitationsThe estate tax charitable deduction is not subject to overall percentage limitations similar to those that may affect the income tax charitable deduction. Thus, if a person left his/her entire net estate to charity, it would be fully deductible regardless of the size of the net estate.
Payment of Taxes and Other Estate Administration CostsThe donor may provide by the terms of the will that the charitable bequest not be reduced by the payment of estate taxes or other estate administration expenses. In fact, such a provision should be encouraged to preserve the gift and the donor's estate tax charitable deduction. If taxes or other costs are paid from the bequest to charity, the deductible amount will have to be reduced to the extent it is invaded to pay taxes and other costs.
Using Bequests to Satisfy a Lifetime PledgeIf an executor uses estate funds to satisfy or complete a lifetime charitable pledge by the decedent, the transfer does not entitle the estate to an estate tax charitable deduction. However, the payment of the pledge may be deductible as a claim against the estate.
Note: The donor may specifically provide a bequest to charity to fulfill a lifetime gift pledge and qualify for the unlimited estate tax charitable deduction. For example, the will could be revised each year (using an amendment to the will called a codicil) to reflect the current balance owed on the pledge.
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