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Treatment of Estate with Charitable Beneficiary: Private Foundation Excise Taxes

When an estate from which the executor or administrator is required to distribute all of the net assets in trust or free of trust to both charitable and noncharitable beneficiaries, is considered terminated for federal income tax purposes, then the estate will be treated as a split-interest trust or charitable trust (if applica­ble) between the date on which the estate is considered terminated and the date on which final distribution of the net assets to the last remaining charitable beneficiary is made. This does not affect the determination of the tax liabil­ity of either charitable or noncharitable benefi­ciaries of the estates.

Example: Henry Post died on January 15, 1983, and bequeathed $10,000 to M, an organi­zation described in section
501(c)(3), and the remainder of his estate to Wilma, his wife.  A deduction for the charitable bequest was al­lowed to Henry’s estate. Substantially all of Henry’s estate consisted of 100 percent of the stock of a wholly owned corporation, certain liquid assets such as marketable stocks and securities and bank accounts, and Henry’s home, automobile, and other personal property. Henry’s will gave his executor a full range of powers, including the power to sell the stock. After Henry’s death, his executor continued to manage the wholly owned corporation while attempting to sell the stock of the corporation. During this period, the executor made no distributions to M. On May 24, 1988, the Internal Revenue Service determined that the administration of the estate has been unnec­essarily prolonged and the estate is considered terminated as of that date for federal income tax purposes. Henry’s estate will be treated as a split-interest trust between May 24,1988, and the date on which the $10,000 bequest to M is satisfied. Henry’s estate will be subject to the private foundation provisions that apply during that period. For example, a sale of the house by the estate to any disqualified person would be an act of self-dealing.


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Page Last Reviewed or Updated: 30-Apr-2013