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May 1992

Value of charitable bequest must be ascertainable at date of death. (Estates & Trusts)

by Bellairs, Chester

    Abstract- Internal Revenue Code Sec 2055 considers bequests to charitable organizations as deductible provided that the value of the bequested property is included in the gross estate. However, an estate will not be entitled to any charitable deduction if its bequest is contingent upon an act or event. In this case, a charitable deduction is only possible if it has been proven, based on the facts known at the time of the donor's death, that any contingency is extremely remote and can therefore be disregarded. Practitioners should carefully examine their clients' wills to check for any possibility that a charitable deduction will be jeopardized.

If a charitable bequest is subject to a contingency, no deduction is allowed unless the act or event is so remote as to be negligible. The determination as to remoteness will be made on the facts existing at the date of death. Any event that might occur in the future, such as the charitable organization actually receiving the bequest, does not have an effect on the remoteness test.

In Estate of David M. Marine v. Commissioner, 97 T.C.-, No. 26, September 23, 1991, the decedent, a resident of Maryland, devised the residue of his estate equally to two universities. In a subsequent year the testator executed a codicil wherein that empowered his executor, in his sole discretion, to compensate persons who had cared for the decedent until his death. To ensure that individuals entitled to this gift after the date of this codicil were to receive the bequest, the provision left open the class of beneficiaries. However, no single bequest was to exceed 1% of the gross estate.

During administration of the estate, the executor made gifts of $10,000 and $15,000 to two individuals. The executor took a charitable deduction of $2.1 million on the federal estate tax return but only distributed $688,351 to each university. Because the IRS denied the charitable deduction and imposed a deficiency, the executor withheld the balance of the estate pending the determination by the Tax Court of the allowance of the charitable deduction.

The Wisdom of the Tax Court

The Tax Court held that the value of the charitable bequest was not ascertainable at the date of the decedent's death. The court referred to the broad power held by the executor, i.e. his "sole and absolute discretion," enable him to give a gift to any individual who had contributed to the "well-being" of the decedent. Although the maximum gift to each individual was 1% of the gross estate, it was possible that, because of the open class of beneficiaries, the residuary could have been exhausted, completely negating the charitable bequests.

The estate argued that it had obtained a surrogate's court order limiting the beneficiaries to the two individuals who actually received the bequests. The court rejected this position--the order was obtained two years after the decedent's death and subsequent to the IRS's denial of the deduction.

The court also returned to the state law for a possible limit on the executor's power to make gifts under the wording of the codicil. However, Marviand law failed to provide such a restriction.

Practitioners are advised to examine any will that might jeopardize a charitable deduction by making the amount that the charity will receive unascertainable as of the date of death.

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