Probate & Trust Law Section Conference Manual ... - Minnesota CLE

C. Source of Charitable Gift – Ordinary Income To Charity. When possible, estate plans
should be drafted to allocate ordinary income to satisfy charitable gifts.
• Individuals are taxed at different tax rates depending upon the type of income
received. Ordinary income like retirement account distributions, interest and
rents are taxed at high rates while long-term capital gains and qualified dividends
are taxed at a lower rate.
• Because charitable organizations do not pay income tax on the receipt of
income, there is a huge tax advantage to ensuring that gifts to charities are
properly made from ordinary income sources and that distributions to individuals
are made from more tax-favored sources (i.e., qualified dividends or capital gains)
or from principal.
Example A: Betty owns the following assets:
IRA - which names her 4 children as beneficiary $200,000
Probate assets (Betty’s will names charities as sole beneficiary):
home 100,000
Bank savings and C/D’s 100,000
RESULT:
•Children receive the taxable assets (making the IRS a major beneficiary).
•Charities receive the non-taxable assets.
•Child named PR has to administer estate for benefit of charities.
Example B – Pecuniary Gift To Charity: Betty owns the following assets:
IRA - no beneficiary $200,000
home 100,000
Bank savings and C/D’s 100,000
All assets (including the IRA) are paid to her probate estate.
Betty wants $40,000 to be given to her church. Betty’s will makes the following gifts:
• I give $40,000 to my church;
• I give the residue of my estate to my children.
RESULT:
• The estate collects the IRA and must report the entire IRA withdrawal as
taxable income.
• No income tax deduction is allowed for the $40,000 gift to charity.
Because the charitable gift is a pecuniary gift (a specific sum of money),
by definition that is a gift from principal and not a gift from income. See
IRS Chief Counsel Advice 200644020 and RIA C-2154.
• The rest of the estate ($360,000) is distributed to the children.
12