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Additional rules and complexities 5. Does the estate contain a the property has been converted to an
govern charitable contributions of principal residence or vacation income-producing property. The memo-
partnership interests, which may result home with significant value? randum is not authoritative; however,
in unintended tax consequences. These types of assets commonly have it does provide insight into the IRS’s
a low basis that would result in capital position and highlights an area of poten-
4. How will beneficiaries be gains tax if sold during life. If held tial scrutiny.
taxed on inherited retirement outright until death, the home will be Planning point: It is important
accounts? included in the estate and receive a basis to weigh the benefits of transferring a
The Setting Every Community Up for adjustment to the fair market value home out of the estate before death ver-
Retirement Enhancement (SECURE) (FMV) on the date of death that will sus holding on to it to receive a potential
Act of 2019, P.L. 116-94, introduced eliminate most of the capital gains tax step-up in basis. Use caution when
significant changes that affect estate owed upon a future sale. If sold during relying on case law in planning, as the
planning for retirement accounts. life, there is a potential personal resi- IRS has not indicated that it agrees with
Beneficiary designations should be dence gain exclusion ($250,000 if single, the outcome of the cases related to de-
reviewed to be sure they reflect the $500,000 if married). ducting a loss on the sale of a residence
intended income tax consequences, It may make sense to transfer the after death.
especially if the account is left to a home into a qualified personal residence
trust. The income tax consequences trust (QPRT) to avoid the inclusion of 6. Will contributions qualify
and period over which minimum future appreciation in the estate. This for the fiduciary income tax
distributions must be taken may vary strategy freezes the home’s value for charitable deduction?
depending on the type of account, the estate tax purposes at the expense of If transfers to charitable organizations
age of the decedent, and the type of forgoing a potential step-up in basis. A are part of the estate plan, it is important
designated beneficiary (e.g., surviving QPRT allows the taxpayer to transfer to ensure the will and trust agreements
spouse, trust, or charity). the home into a trust with a retained are written in a way that allows future
The estate and income tax conse- right to live in the home for a certain charitable contributions to be eligible for
quences of these retirement accounts term. The retained right to live in the the fiduciary income tax charitable de-
can make them an ideal asset to leave home discounts the value of the gift duction. Charitable deduction rules for
to a charity if charitable planning is to the trust, and, assuming the tax- fiduciary income tax are generally more
part of the overall estate plan. This payer outlives the term, the value of the beneficial than the rules for individuals.
shifts the income tax burden from house is excluded from the estate. The Under Sec. 642(c), fiduciary income
both the estate and heirs to an entity transferor must pay FMV rent to con- tax charitable deductions are allowed
not subject to income taxes. tinue living in the house once the term only when the governing document
Roth conversions have also become has ended. specifically allows for charitable con-
increasingly popular, as they allow An estate may also have an oppor- tributions. The deduction is limited to
the taxpayer to convert the account tunity to deduct a loss on the sale of a the amount given to charity that was
from a pretax account to an after-tax home when the loss would otherwise paid from current income or prior-year
account, with the income tax liability be nondeductible by an individual. If income. There is generally no adjusted-
for the conversion being borne by the value of the home declines after the gross-income (AGI) limitation for gifts
the taxpayer. This strategy avoids date of death, or if a loss is generated to charity, and there are broader and
income tax consequences for the estate due to selling costs, case law (Miller, more flexible charitable contribution
or beneficiary. T.C. Memo. 1967-44, and Watkins, T.C. deduction rules compared to those for
Planning point: Review existing Memo. 1973-167) supports possible de- individuals. However, fiduciary income
estate plans to ensure wishes will still ductibility of the loss since the home is a tax returns do not allow a carryover of
be fulfilled in light of recently en- capital asset held by the estate. This loss excess charitable contributions.
acted legislation, proposed legislation, may be deductible on the estate’s income If a trust has trade or business in-
and pending IRS regulations. Many tax return and be subject to the capital come, the deduction under Sec. 642(c)
planning strategies are available for loss limitation rules. is not allowed with respect to business
taxpayers who hold retirement plan as- Despite case law supporting pos- income under Sec. 681. Sec. 681 pro-
sets. Due to the rules’ complexity, it is sible deductions, IRS Chief Counsel vides for a charitable income tax deduc-
important to work with a professional Memorandum 1998-012 explains that tion based on the same rules that apply
familiar with the law in this area. such a deduction is allowed only when to individuals.

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