People often make their most major donations in their Wills. When you factor in the expanded amount of medical expenses that can be claimed on the terminal tax return, losses that may be carried back from the estate and other extra deductions available in the year of death there is potential to waste some or all of the donations. Without careful planning the donation tax credit available can be higher than tax liability in the year of death.
Often an Estate may take several years to administer and distribute. Over this time a significant tax liability can result in the Estate from income generated subsequent to death. It would be beneficial to have the excess donation credits from the year of death available to the Estate.
One solution to the problem is to build flexibility into the deceased’s Will to allow the Executors to fund the desired donation through a combination of an actual donation to be used on the terminal return and an allocation of estate income to the charities. If the will is worded carefully, the donation portion can create a tax credit on the terminal return and the allocated income can generate a tax deduction to the estate.
Assume a person would like to make a $3 million donation in his Will. With proper drafting, the will could provide the power to Executors to pay donations either at death (claim the donations on the Terminal return), pay the donation from the income of the Estate, or a combination of both. This approach would allow Executors to maximize the use of the charitable donations. The collective tax paid by the deceased and the Estate would be reduced so the funds available to residual beneficiaries would increase.
Without this planning, some or all of the credit from the $3 million donation could go to waste.
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