Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, Certified Public Accountant and Attorney at Law. For over five years, I have worked as a tax professional helping clients with tax mitigation strategies, tax controversies, business transactions, wealth preservation structures, tax-exempt organiations, and estate plans.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Bequests to Charity and Tax Apportionment

Many individuals wish to leave a specific amount of money or particular property to their heirs and the rest of their estate to charity. While this seems straightforward, administering this plan can become complicated when the estate is subject to the estate tax.

The reason is explained in Treas. Reg. § 20.2055-3(a)(1): "If a residuary estate... is bequeathed to charity, and by the local law the Federal estate tax is payable out of the residuary estate, the deduction may not exceed that portion of the residuary estate bequeathed to charity as reduced by the Federal estate tax... [T]he resultant decrease in the amount passing to charity will further reduce the allowable deduction."

Stated differently, the estate tax deduction is based on the amount actually available for charitable uses, which amount is reduced by estate taxes. This "results in a circular, or interrelated, computation because the reduction in the charitable deduction in turn increases the taxes payable that again reduces the charitable deduction and so forth. The calculation must be run until the additional taxes zero out."

This problem can be avoided through careful drafting by either "structuring the charitable bequest as a pre-residuary rather than a residuary bequest" or not allowing for the apportionment of the estate tax on any property set aside for charity. Under the Uniform Estate Tax Apportionment Act, which has been adopted by a handful of states, "charitable beneficiaries generally are insulated from bearing any of the estate tax;" however, this is generally overridden by a tax apportionment clause in a will or trust. Every client must understand their options for apportioning estate taxes (not to mention other inheritance taxes) and the impact the apportionment will have on their distribution scheme.