The Intersection of Charitable Remainder Trusts and Estate Tax, Part III

Nuances in recalculating the charitable remainder and marital deduction, determining amounts deductible, and limiting estate tax apportionment

Table of Contents

1. Intro and Recap

2. The Marital Deduction, and Spousal Gross Estate Inclusion

3. Gross Estate Rule

4. Calculation of the Charitable Deduction

5. Tax Apportionment

6. Conclusion

Intro and Recap

So far in this series, we have explored the question of whether assets in a charitable remainder trust that are subject to gross estate inclusion get a step-up (or step-down) in basis.  We have also explored the scope of gross estate inclusion, using the principles of IRC Section 2036 and 2038. As later discussed in the conclusion to this article, while it is rare to deal with a required estate tax return, an elective return may be required to make a portability election. And, even with an elective return, a full set of fair market value calculations for a charitable remainder trust may be required to determine the estate tax charitable deduction (which, for every dollar of increase, generates a corresponding dollar of increase in the deceased spousal unused exclusion amount).

This brings us to the final installment.  Can we assume that the portion of charitable remainder trust assets that are included in the gross estate under IRC Sections 2036 and/or 2038 are then completely offset by an estate tax charitable deduction? 

If the charitable remainder trust is terminating as a result of the grantor’s death, then the grantor will usually get an offsetting estate tax charitable deduction for the portion of the charitable remainder trust assets included in the gross estate.  But, the premise of this mini-series has been that the grantor’s death is not terminating the charitable remainder trust.  Instead, there is an ongoing income interest for at least one non-charitable beneficiary – whether held concurrently with the grantor (a concurrent income interest), or whether created after the grantor’s death (a successive income interest). 

In the last article, we explored how a concurrent or successive income interest might affect gross estate inclusion under IRC Sections 2036 and 2038.  In this article, we explore how these interests affect the estate tax charitable deduction under IRC Section 2055.  But, before exploring the estate tax charitable deduction, we must first explore its companion – the estate tax marital deduction. 

The Marital Deduction, and Spousal Gross Estate Inclusion

It is well-settled that a surviving spouse’s interest in a charitable remainder trust is subject to the marital deduction, at least so long as the spouse is a U.S. citizen at the time of filing.  The available marital deduction can be found in IRC Section 2056(b)(8), which effectively states that the surviving spouse’s interest will not be treated as a terminable interest under IRC Section 2056(b)(1).  This outcome can be contrasted with the treatment of many marital trusts, which are instead defined as “passing to the surviving spouse” for purposes of IRC Section 2056(a) so long as there is a life estate-equivalent with either (1) a spousal general power of appointment, or (2) a timely QTIP election.