Estate tax and out-of-US charitable will beneficiary

Posted by Earl Kiosterud on January 29, 2007, 2:10 am

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My father has lived in Australia for many years, but is
still a U.S. citizen. He's named the Fred Hollows
organization in Australia as a beneficiary in his will.
It isn't, as would be expected, listed in the U.S. IRS
list of charitable organizations. We are trying to
determine if this bequest is taxable (U.S. estate tax).
Does anyone know, or where we might find this information?

Thanks.

--
Earl Kiosterud
www.smokeylake.com
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Posted by L K Williams on January 30, 2007, 11:31 am

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> My father has lived in Australia for many years, but is

> still a U.S. citizen. He's named the Fred Hollows

> organization in Australia as a beneficiary in his will.

> It isn't, as would be expected, listed in the U.S. IRS

> list of charitable organizations. We are trying to

> determine if this bequest is taxable (U.S. estate tax).

> Does anyone know, or where we might find this information?

Individual bequests are not taxed by US estate tax law. The
estate itself, less allowable deductions, is subject to tax.

If your father's estate is large enough to be taxed (and the
amount depends on which year he chooses to die) his
executor/administrator must file an Estate Tax Return. As
far as I know, only bequests to recognized US charities are
allowable deductions.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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Posted by Shyster1040 on January 30, 2007, 11:31 am

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Most foreign organizations do not qualify as charitable
organizations to which deductible contributions can be made.
See, e.g., IRS Pub. 526, p.6.

As a result, it is highly likely that the bequest to your
father's Australian charitable organization is not
deductible for purposes of determining your father's taxable
estate for US estate tax purposes.

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Posted by cballard@tyyni.net on January 30, 2007, 1:07 pm

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> Most foreign organizations do not qualify as charitable

> organizations to which deductible contributions can be made.

> See, e.g., IRS Pub. 526, p.6.

> As a result, it is highly likely that the bequest to your

> father's Australian charitable organization is not

> deductible for purposes of determining your father's taxable

> estate for US estate tax purposes.

Don't try to apply income tax rules to the estate tax.
There is no requirement in Code section 2055 that the
charitable recipient be a US charity.

The estate tax regulations contain the following provision
under the discussion of what qualifies for the charitable
deduction:

"The deduction is not limited, in the case of estates of
citizens or residents of the United States, to transfers to
domestic corporations or associations, or to trustees for
use within the United States." Reg 20.2055-1(a).

Under Code section 2055, the tests that have to be met in
order to qualfiy for the estate tax charitable deduction
are:

- the foreign charity must be organized and operated
exclusively for religious, charitable, scientific, literary,
or educational purposes (including the encouragement of art
and for the prevention of cruelty to children or animals)

- no part of the net earnings of the foreign charity
inures to the benefit of any private stockholder or
individual (other than amounts legitimately paid to
individuals as part of the charitable purposes of the
organization)

- the foreign charity does not participate in attempting
to influence legislation to an extent that, if it were a
U.S. organization, it would not be eligible for tax
exemption under Code section 501(c)(3)

- the foreign charity does not participate in, or
intervene in (including the publishing or distributing of
statements), any political campaign on behalf of or in
opposition to any candidate for public office.

Note, however, that if the decedant's gross estate is larger
than the filing threshold, an estate tax return is still
supposed to be filed, even if deductions are large enough to
result in no tax being due.

We don't have enough information about the Australian
charity in question to determine whether it would qualify
for the deduction. You should be able to look at how the
organization is organized and operated, apply the tests
above, and determine whether it would qualify for the estate
tax charitable deduction. If you are in doubt, I would
recommend retaining a U.S. attorney specializing in estate
tax matters who could write an opinion for you regarding the
matter.

--Chris

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Posted by Shyster1040 on January 30, 2007, 9:52 pm

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I agree, application of income tax rules to estate tax rules
can be fraught with peril. That is, in part, why I
qualified my answer, since I had found what I referred to,
but hadn't the time to get more in-depth (whaddya expect?
I'm not getting paid here).

The citation to Treas. Reg. 20.2055-1 is good, as are a
number of private letter rulings the IRS has issued
regarding donations made to foreign non-governmental
charitable organizations. See, e.g., PLR 9821044,
5/22/1998. The PLR is particuarly useful because it is both
fairly recent and puts more flesh on the bones of the Code
and Regs as to what constitutes a "foreign charity" as to
which donations are deductible for estate tax purposes.

Thus, if the OP can show that the organization set up by his father:

provides that bequests do not inure to the benefit of any
private shareholder or individual other than those to whom
distributions are made pursuant to the governing instrument
of the organization,

the bequest is not used for a noncharitable purpose,

the governing provisions meet the requirements of section
508(e), and

he organization maintains its status in Australia as an
exempt foundation,

then the OP has a reasonable chance of being able to deduct
the bequest to the organization for US estate tax purposes.

In this case, since it was an organization set up by his
father, there may be problems

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