May 2011: Planned Giving Tip of the Month

The Benefits of Charitable Contributions By Trusts

By, Patricia A. Rowe, Esq. CPA

An irrevocable trust** may reduce its taxable income by making charitable contributions during the year. An irrevocable trust is one which is required to file its own tax returns each year and pay taxes on any income that is not distributed to beneficiaries. Many individuals have an irrevocable “exemption” or “by-pass” trust that came into existence when their spouse died.

Congress has made tax rates on trusts very high in an effort to encourage trusts to distribute the income to its beneficiaries each year so they may pay taxes on the income at the individual’s higher tax rates. This gives a good opportunity for tax planning to shift deductions to the trust. In the event the beneficiary does not need the additional income from the trust this is a good way to eliminate that income before year end.

Charitable Deductions for Individuals Are Limited

Charitable deductions of cash are limited on an individual’s tax return to 50 % of the adjusted gross income (“AGI”) each year. Certain non-cash contributions are limited to 30 % of AGI. The balance is carried forward. The charitable deduction on a trust tax return is allowed up to 100 % of net income. The trust may give more than its net income but it will not receive any tax benefit from it.

Tax Planning

When a trust makes distributions to beneficiaries during the year the trust gets a deduction up to the amount of its net income. Then the net income is passed through to the beneficiary who reports the income on his or her individual tax return. If the trust makes a charitable contribution this deduction reduces its net taxable income that is passed through to the beneficiary. Therefore, charitable giving presents a good opportunity for tax planning when a trust has income and the individual wants to reduce the income passed through to him or her and get the full benefit of a donation. There may be circumstances when the beneficiary fails to make estimated tax payments on the trust income during the year and is in a situation where he or she will have a penalty for underpayment of estimated taxes. The charitable contribution by the trust can eliminate the penalties.


**In this article we are referring to irrevocable trusts. A revocable living trust is a grantor trust. It does not file its own tax returns or pay its own taxes. All income and deductions of a grantor trust are reported by the grantor on his or her own tax return. Therefore, these planning techniques will not apply to revocable living trusts.

Feel free to contact the Law Offices of Patricia Rowe if you would like to obtain more information about this or any other subject related to taxes, trusts, charitable giving, probate, etc.

By, Patricia A. Rowe, Esq. CPA

39 Quail Ct., # 106

Walnut Creek, CA  94596

(925) 256-1000

Website:  www.

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