Charity deduction on 706-1041-1040-tough issue

[DMICPA]

Married client died, 706 lists debt of decedent to charity $300,00 and is deducted from gross estate. Form 706 was filed but no estate tax due. I did not prepare the 706 but have been asked to prepare the 1041, first and final and surviving spouse's 1040.

Since the charity was listed on the 706 as accrued but not paid, can the wife deduct the charity when actually paid? It seems like a double dipping situation but there are some things such as accrued property taxes that can be taken on both the 706 and 1041 or 1040. There was no tax benefit to the 706 side and since the wife has all tax exempt income, probably will not be a tax benefit but I want to do all things correctly.

If client cannot deduct the $300,000, there would seem to be a problem as she should not have to pay it with her personal funds. This should come out of the QTIP trust funds I would think.

Any Ideas. These things will be coming up more frequently as our client base ages.

Bob

[Burke]

It was listed as a debt? Or was it provided as a bequest in the will listing the charity as a beneficiary? Either way, it comes out of the estate funds, and would not be deducted personally by the surviving spouse. It should have been paid out before the trust was funded. Hard to be specific without seeing the will.

[DMICPA]

Charity Debt

It was listed as a debt of the decedent, Schedule K, as a pledge. This was not even in the will. It was an agreement for the taxpayer to donate this sum to the charity over the next couple of years. So, since it was a deduction on the 706, there is no deduction on the Schedule A 1040 because the funds should be paid out of the Trust funds and not the surviving spouse funds. I can still get the attorneys to make certain the funds are Trust funds.

Since there was no tax on the 706, maybe it should have been deducted on the surviving spouse 1040.

All of the remaining property would have been in the unlimited marital exclusion so there would be no estate tax.

Thanks

[Burke]

Hmm.... not so sure it should have been listed as a "debt." For Debts of the Decedent, it says...."any enforceable claim based on a promise or agreement of the decedent to make a contribution (such as a pledge or a subscription) to or for the use of a charitable, public, religious, etc, organization to the extent that the deduction would be allowed as a bequest under the statute that applies." Would the charity have made claim against the estate? Did they? I think the key word here is "enforceable." However, I am assuming it still would not have made any difference if it had not been listed on the 706, as far as estate tax, since the marital deduction is unlimited. If the widow does not want to pay this out of her personal funds (for which she could take a deduction), I believe it should be paid out of the estate. If there are attorneys involved, this is a good question to run by them. They probably did the 706 in the first place.

[DMICPA]

706 charity

Yes, I will probably get as much assistance from the Attorneys as I need to so that I am comfortable that I am doing everything correct as they did the 706 and allowed me to review it before filing. They were impressed by the review and they want me to take on the 1041 and subsequent Trusts that will be set up. While I have experience in this, the size of the dollars is intimidating as the estate has millions of dollars in assets.

The Charity thing was a written contract. It probably would not have made any difference on the 706 as no estate tax. Surviving spouse has all tax exempt bonds and high property taxes on homes so there will be no income tax at the 1040 level. The charity contributions in the past are being carried over as there is no taxable income on the 1040s or State.

Thank you for your thoughts.

Bob

[Roland Slugg]

You characterized this as a "tough issue," but it's really not. Charitable contributions are deductible, by the person or entity (trust or corporation) that pays them, and in the tax year when they are paid. (Code §170(a)) This is true even if the amount was pledged in an earlier year. (Regs 1.170A-1(a)) The amount of the deduction, of course, is subject to the deductible percentage ceiling of 50% for most contributions (10% for corporations), with any excess carried over for up to five years.

If the decedent was married and left everything to his wife, why are you planning to file a fiduciary return, F-1041? Did the decedent have his own separate trust? If not, the surviving spouse pays the $300k to the charity and gets the deduction on her own return. She would file a joint return with her late husband for the year in which he died.

As for the $300k deduction on F-706, it shouldn't have been listed as a debt. A mere pledge does not create an enforceable debt for this purpose. It's possible that the $300k could have been deducted on F-706 (on Schedule O) as a charitable gift/bequest, but in order for this to be true, the $300k would have to be specified in the decedent's will or held in trust that terminates upon his death and transfers the funds to the charitable organization.

[DMICPA]

706 vs 1041 vs 1040 expenses

Certain expenses can be deduction on a 706 or a 1040 such as Medical expenses. The medical expenses don't have to be paid to be on the 706.

Administration expenses can be deducted either from the 706 or the 1041 but not both places.

Some expenses such as taxes, interest and other items accrued but not paid at death can be deducted on the 706 and the 1040.

I have not found a rule on the charity which was listed on the 706 as a claim against the estate as an accrued expense.

I will ask the attorney firm to clarify.


A 1041 is needed because the surviving spouse did not inherit the bulk of the assets. Substantial property was put in a QTIP and there was a probate on some of the other property.

[Burke]

I have not found a rule on the charity which was listed on the 706 as a claim against the estate as an accrued expense. I will ask the attorney firm to clarify.
.

Apparently, there is such a rule. i.e, that the charitable contribution can be deducted on the 706 or the 1041, but not both. See Crestar Bank vs IRS where it was disallowed as a deduction in both places. Since it was shown as a debt in your case, (and it can be determined that it is a legitimate debt,) it is possible that it could be deducted on the 1041 as a charitable deduction when paid. I would have the attorney give me an opinion in writing.
https://www.pgdc.com/pgdc/know-diffe...-are-not-equal.

[DMICPA]

Double Deduction

Thank you for clarifying this. Since the amount was material, I did not want to screw this up.