6. Will contributions qualify for the fiduciary income tax charitable deduction?
If transfers to charitable organizations are part of the estate plan, it is important to ensure the will and trust agreements are written in a way that allows future charitable contributions to be eligible for the fiduciary income tax charitable deduction. Charitable deduction rules for fiduciary income tax are generally more beneficial than the rules for individuals.
Under Sec. 642(c), fiduciary income tax charitable deductions are allowed only when the governing document specifically allows for charitable contributions. The deduction is limited to the amount given to charity that was paid from current income or prior-year income. There is generally no adjusted-gross-income (AGI) limitation for gifts to charity, and there are broader and more flexible charitable contribution deduction rules compared to those for individuals. However, fiduciary income tax returns do not allow a carryover of excess charitable contributions.
If a trust has trade or business income, the deduction under Sec. 642(c) is not allowed with respect to business income under Sec. 681. Sec. 681 provides for a charitable income tax deduction based on the same rules that apply to individuals.
A special election under Regs. Sec. 1.642(c)-1(b) allows a trustee to treat contributions made in the subsequent year as a current-year charitable deduction, allowing for additional flexibility in income tax planning. For example, a trust filing a 2022 tax return with $1 million of gross income can make a $1 million charitable contribution before Dec. 31, 2023, and elect to treat it as a 2022 deduction to reduce its gross income to $0.
Planning point: Creating and funding a trust for charitable purposes can help to maximize deductions and contribute to a broader set of organizations. Generally, no AGI limitation is applied to gifts to charity on the fiduciary income tax return. This means that a trust created for charitable purposes may be able to take a deduction of up to 100% of its gross income.