Federal Estate Tax Charitable Deduction
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UPDATED: Jul 16, 2021
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You can give any amount – no matter how large–either at life or at death — to a qualified charity completely tax-free. In most cases, an eligible recipient must be (1) US or a state, its political subdivison, and the transfer is for exclusively public purposes; (2) a corporation organized and operated exclusively for charitable, religious, educational, scientific, literary purposes; (3) a trustee or fraternal society operating under a lodge system, if the property is to be used exclusively for religious, educational, scientific, literary purposes; (4) veterans organizations incorporated by Congress or any of its departments; and (5) an ESOP (employee stock ownership plan) if the transfer constitutes a gratituous transfer under certain federal rules.
The charitable deduction is determined by the value of property that was transferred to the eligible recipient. There are no limitations on the value of the deduction. The assets must be included in the gross estate of the decedent for the deduction to apply, but the amount contributed is fully deductible before the tax rates are applied. In a very simplistic example, if you give your entire estate to a qualified charitable organization, there is no estate tax liability on the transfer. Said another way: charitable gifts made by you will save estate taxes because the gift is not taxed to your estate.
Qualified disclaimers are also effective to use to take advantage of the indexed estate tax exclusion. An individual who disclaims property is treated as if s/he never received the property for estate and gift tax purposes. Instead, the interest is considered as having passed directly from the decedent to the person entitled to receive the property because of the operation of the disclaimer.
The charitable deduction is allowed for amounts that are transferred to charitable organizations as a result of a qualified disclaimer.
A qualified disclaimer must be an irrevocable and unqualified refusal by a person to accept an interest in property but only if certain conditions are met. The disclaimer must be in writing and given to whoever is transferring the property’s interest.
Understanding how a disclaimer works in your estate plan requires careful consideration of what you what to accomplish. To make sure your assets are structured so that your estate can take advantage of the charitable deduction, it makes sense to hire a tax or estate planning attorney to guide you through the planning process.