Tax advantages of making charitable contributions with IRD (Income in Respect to a Decedent)

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To recap, IRD is typically income that has accrued to a decedent but has not been paid and is therefore not properly includable on the decedent’s final tax return. When an estate or other successor receives a right to income that is classified as IRD, the item is included in the recipient’s gross income (without a fresh-start basis) and the recipient may have an income tax deduction for any estate tax attributable to this item.

For more background see these other knowledge base articles: The problem of the disappearing income: Income in Respect to a Decedent link, What are Income in Respect of a Decedent (IRD) and the IRD deduction? link, What counts as Income in Respect to a Decedent? link.

If a decedent has a large amount of IRD assets, for example, in the form of IRAs, charitable bequest are best funded with these IRD assets because the entire pre-tax amount of IRD can be transferred tax-free to a tax-exempt charity. However, this requires some careful planning, otherwise things may go wrong as Professor Hoyt explains:

“The worst-case scenario is that an estate or trust might have to recognize taxable IRD but will not be able to claim an offsetting charitable income tax deduction, despite the transfer to a charity. This can happen when IRD is payable to an estate or a trust whose governing instrument doesn’t contain instructions that assure the offsetting charitable income tax deduction.”

Instead, estate planners should ensure that IRD can be transferred to a charity or to a tax-exempt charitable remainder trust (“CRT”) in such a way that the income is never recognized by the estate or trust. IRD is taxed to the person who is legally entitled to receive it. If a charity or CRT is entitled to receive the IRD, then it, rather than an estate or trust, should report the income.

Furthermore, as a fallback provision, according to Professor Hoyt, every will and trust instrument should contain instructions that if the estate or trust will make a charitable bequest, then the estate or trust will make that payment first with IRD so that the estate or trust is entitled to a charitable income tax deduction.

Christopher Hoyt (2015). Income tax deductions for charitable bequests of IRD.

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