Trust does church beneficiary get a K-1

[Strongsilence-CPA]

I think the answer is No.  Can an estate take a charitable deduction in this situation?

The church is a named beneficiary in the trust document (for 1%).  My initial thought is that the payment can’t be a charity deduction and a distribution because allowing a deduction for an estate distribution seems like double-dipping.

The instructions say “Generally, any part of the gross income of an estate or trust (other than a simple trust) that, under the terms of the will or governing instrument, is paid (or treated as paid) during the tax year for a charitable purpose specified in section 170(c) is allowed as a deduction to the estate or trust.”

The money comes must come out of gross income.  I can’t tell if the payment came from income or if it was paid from principal. The trust says “...my assets are to be distributed as follows...” and I think the term “assets” is understood to be principal.  So that is an argument AGAINST a charitable deduction for the estate.

In a conversation of CPAs from 2009 one practitioner said that churches don’t get K-1s.

But why wouldn't they?  They pay tax on UBTI and I think a K-1 could have UBTI.

Accepting that that a K-1 should not be provided to a church, then the percentage of the estate listed by the trust grantor in the trust document for the church must be allocated to the remaining beneficiaries.  And this doesn’t seem right and I as a CPA don’t want to determine how that percentage is shared.

I think this trust document appears shoddy and doesn't include a provision allowing for a charitable deduction (except including the church in the list of beneficiaries.)  I think the trust is poorly done but I don’t have enough experience to say definitively.

IRC 642 applies to charitable deductions from a trust or estate but doesn't address my question.

[sjrcpa]

Do you have a trust or an estate?

Does the charity get x% of the residual?

Generally assets does mean principal.

How much time elapsed from when the entity was created and when money is disbursed to the charity?

You can ask the lawyer (or the paralegal who is doing the Accounting) whether the distribution is principal only or income and principal and how much of each.

[BobKamman]

I found that 2009 discussion on the Ed Slott board, involving an IRA passing through an estate to a church.  (I think it would be better to think in terms of "nonprofit," because the same rules should apply to the Girl Scouts or Humane Society.)  I don't think anyone back then had any authority or reasoning for what they were saying.  What you should keep in mind is that even if the trust instrument says "pay it out of principal," or "pay it based on how much principal the trust has," for tax purposes it is deemed to come first out of income. 

I had a similar case about ten years ago, with 40% of the estate distributions going to four different charities.  I think I claimed it a a charitable deduction.  There wasn't any UBTI involved.  I didn't spend a whole of time worrying about it, because, who's looking?  When was the last time you heard of an IRS audit of a trust?  And if they wanted to do that and move it to a K-1 distribution, there's no tax consequence.  If they want to propose a penalty for no K-1, I would help them find a place for it where the sun doesn't shine.  

When there is a situation that involves a church getting a percentage for 20 years, and it's not a charitable remainder trust, I'll worry about it some more.  

[Strongsilence-CPA]

Estate

% of the residual?  No.  This is a very basic trust doc with handwritten amendments. 

The executor hasn't hired a lawyer.

Estate created DOD July 2021 and the Trustee paid the Charity in December 2021.

These numbers are so small and 2 of the beneficiaries don't need to file income tax returns that I feel I've wasted my time.  

[Strongsilence-CPA]

Thanks Bob.  "What you should keep in mind is that even if the trust instrument says, "pay it out of principal," or "pay it based on how much principal the trust has," for tax purposes it is deemed to come first out of income."

I'm in CA and CA has its own UPIA that I would want to check this before making that conclusion.

If we treat is as a charitable deduction, then the payment can't be a distribution too.  In my mind that makes sense.  And then if it isn't a distribution how is the church's percentage allocated.  Even though it is only 1%, small peanuts, what should I advise the trusted to do?  I know the trustee isn't required to file a 1040 so he might accept taking the entire 1% additional income.

"I had a similar case about ten years ago, with 40% of the estate distributions going to four different charities.  I think I claimed it as a charitable deduction.  There wasn't any UBTI involved. "

I can't know if the nonprofit has UBTI.  This is an argument that the nonprofit should get a K-1 because it is the nonprofit that knows their situation with respect to UBTI.

The lack of trust audits would make me feel comfortable calling it charitable deduction (even if it is correctly per the trust document a distribution.)

[Strongsilence-CPA]

California UPIA. My quick scan shows nothing that contradicts a charitable payment from income.  This passage is relevant. I'm going to get the rest of the trust document today and read it.

A trustee may not make an adjustment between principal and income in any of the following circumstances....

(4) Where it would be made from any amount that is permanently set aside for charitable purposes under a will or trust, unless both income and principal are so set aside.

If the 1% to the charity was 50% or the numbers were very large, I would consult with an attorney. 

Thanks for your input.

[BobKamman]

"I'm in CA and CA has its own UPIA that I would want to check this before making that conclusion."

State law has nothing to do with determination of distributable net income on a Form 1041.  The only time that PIA becomes a PIA is when you have to allocate capital gains to the trust/estate or to the beneficiary.  I see far too many cookie-cutter trusts where that power is not given to the trustee, but that's not the topic here. 

I don't see how it affects the other beneficiaries, whether you claim it as a charitable deduction or as part of DNI.  Say the income is $10,000.  The church gets $100.  On the 1041, it  doesn't matter whether it is paid from principal or income.  Claiming a charitable deduction, your DNI is now down to $9,900.  Same result to the beneficiaries, as when you call it $10,000 with $100 going to the church and $9,900 to them.  

Incidentally, my guess is that the one percent to the church is not the result of fervent religious belief, but was meant to keep the other beneficiaries (my guess is there is only one, who is also the trustee) from agreeing to dissolve the trust.  

[Strongsilence-CPA]

Thank you for the lesson about PIA.

" don't see how it affects the other beneficiaries..."

First, a charitable deduction lowers DNI while a distribution does not. This is what I am seeing on the DNI line 7 of Schedule B when I run treat the deduction from income compared to when I treat the deduction as corpus.   This is at odds with what I am reading in your previous response.

Second, if it is claimed as a charity deduction then there would be no distribution to the charity beneficiary. If there is no distribution to the charity beneficiary, then the distribution percentage (of 1%) must be allocated to the remaining three.  Is this reasoning incorrect?

Maybe the church beneficiary remains as a 1% beneficiary AND the estate gets a charitable deduction.  

[BobKamman]

If my example is wrong, tell me where.

Say the income is $10,000.  The church gets $100.  On the 1041, it  doesn't matter whether it is paid from principal or income.  Claiming a charitable deduction, your DNI is now down to $9,900.  Same result to the beneficiaries, as when you call it $10,000 with $100 going to the church and $9,900 to them.  

[Strongsilence-CPA]

DNI will be 10000 in the distribution scenario.