The Tax Cuts and Jobs Act of 2017 changed the rules for individuals giving to charity since it lowered tax rates and increased the standard deduction, resulting in fewer taxpayers itemizing charitable deductions.
But the rules as applied to charitable contributions made from estates and trusts aren’t necessarily the same. That’s according to a recent podcast from The American College of Trust and Estate Counsel (ACTEC), explaining these charitable deductions under the tax code.
It’s unclear how the sunset of the 2017 tax changes in 2025 and the presidential election may impact those changes. But for now, trusts and estates may still be able to claim deductions that individuals may not qualify for, according to Travis Hayes, an ACTEC Fellow from Naples, Fla., who hosted the podcast.
For a planning perspective, professional advisors need to keep in mind the two requirements for a trust or estate to qualify to claim the charitable deduction, said Jere Doyle, another ACTEC Fellow on the podcast.
First, the payment to a charity must come from the trust or estate’s gross income. Gross income refers to taxable income, not accounting income. This includes capital gains or income from the deceased, he said.
Second, the payment must be authorized by the governing document, such as a will or trust. Doyle emphasized that if the governing document does not include authority to make charitable contributions, the trust or estate cannot claim a deduction.
Doyle also pointed out that the rules for trusts and estates differ from individual charitable deductions. For example, individuals are limited by a percentage of their adjusted gross income but trusts and estates have no such limit under the tax code. Additionally, trusts and estates can claim deductions for donations to foreign charities, which individuals generally cannot do.
Doyle stressed the importance of careful drafting of estate documents. He noted that one common mistake is not including language that allows the trust or estate to make charitable contributions, which can prevent the deduction from being claimed.
The Internal Revenue Code Section 642(c) covers the estate and trust charitable deduction.
The Community Foundation often partners with professional advisors to work with their clients’ estate and trust charitable contributions, providing a philanthropic vehicle to make a positive impact on the local community while ensuring all tax implications are considered.
