Home Estate Planners Corner

State Death Taxes and Charitable QTIP Trusts 

Spouses who wish to provide income to a surviving spouse, remainder to charity, often find it simpler to establish a QTIP trust rather than a charitable remainder trust.  The QTIP trust, which must pay the survivor all the trust income for life, would qualify for the estate tax marital deduction when the first spouse dies and for the charitable deduction at the death of the surviving spouse. 

CRTs are more complex to draft, and pay a unitrust amount or an annuity – not all the trust income – to the beneficiary.   “Charitable QTIP trusts” must nonetheless pass muster under IRC §2056(b)(7).  A husband created a QTIP trust for his wife, remainder to charity, giving the trustee discretion to distribute income and principal.  Because trust income could be accumulated, the widow is not guaranteed of receiving all the income for life and her interest does not qualify for the marital deduction, according to the IRS (TAM 200444023).

Donors who live in states with a stand-alone state death tax, or who own real or tangible personal property in such states, should determine whether the state specifically permits a QTIP election independent of the federal QTIP election.  Several states with stand-alone estate or inheritance taxes do not provide a state marital deduction unless a federal QTIP election has been made under IRC §2056, which may not be possible during the 2010 one-year repeal of the federal estate tax.  No QTIP election is needed, however, for qualified charitable remainder trusts created under IRC §2056(b)(8).  States that permit a QTIP election independent of the federal estate tax election  include Indiana, Kentucky, Maine, Maryland, Massachusetts, New Jersey, Ohio, Oregon, Pennsylvania, Rhode Island and Tennessee.

IRS Report Sheds Light on Noncash Charitable Contributions

The IRS has released the Spring 2010 issue of the Statistics of Income Bulletin which includes an article on noncash charitable contributions reported by individuals for the 2007 tax year. (See http://www.irs.gov/taxstats/article/0,,id=223451,00.html.) Nearly $60 billion in deductions were claimed for noncash contributions in 2007, which was a good year for the stock market, and the SOI report probably reflects an increased availability of highly appreciated assets to donors during that time period. 

The Spring SOI article reported the following:

1. 202,019 tax returns filed for 2007 included gifts of corporate stock, averaging $52,634 per gift;

2. 14,160 returns listed gifts of mutual funds, with an average gift amount of $60,650;

3. 4,215 returns showed gifts of “other investments,” defined as bonds, life insurance, annuities, CDs, life insurance policies, notes, options, partnership interests, and real estate investment trusts, with an average gift size of $254,792;

4. 8,552 returns listed gifts of real estate (apartments, cabins, houses, and other residential and commercial property), with an average gift amount of $190,995;

5. Gifts of  “land” (farms, orchards and open lots) appeared on 7,811 returns, averaging $489,360 per contribution;

6. Conservation easement gifts were claimed on 2,231 returns, averaging $812,364;

7. Facade easement contributions were listed on 228 returns, with an average value of $918,392;

8. Gifts of art and collectibles appeared on 69,762 returns, with an average gift amount of $9,133;

9. Cars and other vehicles were reported as gifts by 327,911 donors

10. The vast majority of noncash gifts were of clothing (5,283,547 returns) or household items (2,404,979 returns).

The surge in the stock market since March 2009 may have given gave new life to noncash gifts of long-term capital gain property.  Clients save capital gains taxes and receive charitable deductions based on their assets’ current fair market value when they give appreciated stocks, real estate, bonds and mutual funds, held more than one year.  For more on planning gifts of appreciated assets, see the discussion beginning on page 2-105 of the Charitable Giving Tax Service.

Tax Consequences When a Gift Is Returned

It occasionally happens that a charitable gift is returned to a donor, for one reason or another, in a year following the contribution.  The tax results are fairly clear:  The tax benefit rule (IRC §111) provides that if a person recovers an amount for which he was allowed a deduction in a prior year, he must include the amount in his income for the year of recovery.

In one case, an individual gave a building to a hospital, which the hospital, because of damage caused by weather and vandals, returned to him in a subsequent taxable year. The gift to the hospital was unconditional, and there was no obligation to reconvey the building; the hospital simply wanted to undo the gift because it found the building more of a problem than it was worth. The IRS took the position that the fair market value of the building, as of the date of the gift, was includible in the donor’s gross income for the taxable year of the reconveyance, under the tax benefit rule. The donor responded by arguing that the return of the building was a gift and that therefore the tax benefit rule was inapplicable. The Tax Court agreed with the IRS and found that the return of the building was not made out of “detached and disinterested generosity” [Comm’r. v. Duberstein, 363 U.S. 278 (1960)] and thus was not a gift.

Comment: The donor might have been better off contributing the amount of the demolition costs to the hospital and letting it demolish the building, rather than accepting a reconveyance. He would have been allowed a deduction for the amount contributed, and he would have avoided the tax benefit rule.

Tax Strategies for Philanthropic Families

High net worth individuals who support charitable, religious or educational organizations may have adult children who also give generously to worthwhile causes.  It might make sense for such parents to make charitable contributions on their children’s behalf, covering their annual gifts and possibly major gifts to capital campaigns.  Several tax advantages should be available:

1. Parents may be in higher tax brackets and thus enjoy larger tax savings than their children;

2. Contributed amounts are removed from the parents’ estates and should not constitute taxable gifts unless they satisfy legally binding pledges of the children;

3. Gifts can be planned so that the children receive credit from the organizations for annual or major gifts.

Charity as the “Ultimate Contingent Beneficiary” of an Estate

Arguably, every will should contain one or more alternative charitable bequests.  These bequests provide flexibility in carrying out an individual’s testamentary desires in the face of changing circumstances and unforeseen events.

Qualified disclaimer – If an individual makes a qualified disclaimer of a bequest under IRC §2518 and the bequest property passes under an alternative bequest to a qualified charity, the decedent’s estate will be allowed a deduction for the amount passing to charity.  This arrangement allows a family beneficiary who feels he or she does not need all that a testator has provided to pass along all or part of a bequest to a worthwhile cause favored by the testator [IRC §2518(c)] – and also provide tax savings to the estate, especially if the bequest that is disclaimed is IRD.

Contingent bequests – Individuals sometimes provide that bequests shall pass to named charities if the primary beneficiary – a friend or family member – should predecease them.  Another use of alternative charitable bequest clauses is to cover the possibility that ALL intended beneficiaries predecease the estate owner, or the possibility that the testator and his or her intended beneficiaries are killed in a common disaster.  The advantage of naming a charity as one’s “ultimate contingent beneficiary” is twofold:  (1) the testator avoids having his or her estate pass to distant (perhaps unknown) relatives.  In unusual cases, the estate could even escheat to the state.  Instead, the testator has the satisfaction of knowing a worthwhile cause will benefit (2) the estate will completely avoid federal estate taxes, and perhaps state death taxes, if everything passes to charity under an alternative bequest.

<back
Copyright © R&R Newkirk. All rights reserved.