Charitable giving is a common part of estate planning. In addition to supporting organizations you deem worthwhile, charitable gifts can reduce the taxable value of your estate. Just as charitable gifts are deductible from personal income taxes while you’re alive, similar gifts made after death are deductible from the gross estate subject to federal gift and estate taxes.
The important thing to remember is not all charitable donations qualify as tax-deductible. The Internal Revenue Code recognizes 28 different types of “nonprofit” organizations that do not have to pay any income taxes. Only one of these classifications-known as a 501(c)(3)-
is considered “charitable” whereby a donor may deduct contributions from his or her taxable income or estate.
The 501(c)(3) classification actually applies to a broad range of groups that engage in charitable, educational, religious, scientific, and amateur athletic activities. The IRS interprets charitable to include any activities aimed at relief of the poor, distressed and underprivileged.
Charities are distinguished from action organizations, which are groups that exist primarily to influence the political process through legislation or the election of particular candidates. A 501(c)(3) organization may engage in limited lobbying activities but may not support candidates in any election.
Within the 501(c)(3) classification there are two types of exempt organizations-private foundations and public charities. A private foundation is an organization principally funded through a single major donor. Many individuals establish such foundations as part of their estate planning. The foundation then distributes the income from its endowment as grants to other tax-
In contrast, a public charity receives a “substantial” portion of its income from the general public, private foundations or the government. Public charities engage in fundraising and may receive additional income from activities designed to further its mission. The more sophisticated public charities have staff dedicated to planned giving, working with individuals who want to incorporate gifts as part of their estate planning.
Learning More About a Charitable Organization
If you’re thinking about making a gift to a public charity in your will or trust, the first step is to make sure the recipient is properly recognized by the Internal Revenue Service. The IRS has an online search tool that can tell you which organizations are eligible to receive tax-deductible donations. Some organizations may lose their tax-exempt status if they fail to file required annual returns with the IRS.
Most public charities have to file a tax return called a Form 990. Unlike personal income tax returns, which are confidential, a public charity’s Form 990 is a matter of public record. The organization must keep its three most recent returns on file and produce them upon request to anyone who asks. (You can also request copies directly from the IRS.) The only information on
the Form 990 not subject to public disclosure are the names and addresses of donors.
It’s a good idea to review the organization’s Form 990 to gain insight into how the charity spends its money-that is, how much is spent on the group’s mission versus fundraising and administrative overhead. You can also learn more basic details from a Form 990 such as who sits on the organization’s board of directors and what subsidiary groups, if any, may exist.
As with all aspects of your estate plan, it’s important to consult with an experienced California estate planning attorney before you commit to a major postmortem gift to a charitable organization. If you have any questions about charitable gifts and IRS rules governing tax-
exempt organizations, contact the Law Office of Scott C. Soady at 1-858-618-5510.