Maxine Aaronson, Attorney at Law
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Estate Planning Newsletter

  • The QDOT and Non-Citizen Spouse
    A QDOT is a specific type of marital deduction trust that is designed to ensure that non-citizen spouses will eventually pay any taxes that may be due upon distribution of the principal from the trust, even if the surviving spouse... Read more.
  • Conservators of the Person and of the Estate
    A “conservator” is a court-appointed individual assigned to handle the daily affairs of those who cannot care for themselves due to physical or mental limitations (the “conservatee”). Conservatorships are... Read more.
  • A Parent's Inheritance Can Affect Child Support Payments
    The federal Child Support Enforcement Act of 1984 requires each state to develop its own set of systematic guidelines for calculating awards of child support. Generally, state child support guidelines are based on the parents’... Read more.
  • Privacy Rule Protects Confidential Health Information
    The Health Insurance Portability and Accountability Act of 1996 (HIPAA) became effective on April 14, 2003. HIPAA establishes national standards for the protection of certain health information. The purpose of HIPAA is to ensure that a... Read more.
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Using Non-U.S. Assets to Fund Charitable Bequests

Taxpayers who make contributions to qualified charitable organizations are entitled to a tax benefit in the form of a charitable deduction on their income taxes. However, the issue becomes more complex when a non-U.S. citizen makes a bequest to a qualified charitable organization with non-U.S. assets, and then claims a charitable deduction.

Proportional Deduction for Charitable Bequests Paid With Non-U.S. Assets

The Tax Court has held that, in order to deduct charitable bequests in full upon filing a United States Estate Tax Return, the bequests must have been funded from property subject to the U.S. estate tax. If the bequests are funded with property located outside of the U.S., then the taxpayer will only be entitled to a proportional deduction. The deduction is calculated by dividing the value of U.S. assets by the value of worldwide assets, multiplied by the amount of charitable bequests.

In one case, a Canadian citizen had assets worth $516,268 in the U.S. and more than $100 million in Canada. His will provided for charitable bequests to Canadian-registered charities, and when he died the bequests were paid out of his Canadian funds. His estate filed a United States Estate Tax Return and claimed a charitable contribution deduction of approximately $312,840. However, the IRS only allowed a limited charitable deduction of $1,615 based on the following formula: ($516,268/$100 million) x $312,840 = $1,615.

U.S.-Canada Treaty on Income and Capital

Where the charitable bequest at issue is made by a Canadian resident who owns property in the U.S., it is important to consider the U.S.-Canada Treaty with respect to taxes on income and capital as amended by the (third) protocol in 1995. Some relevant provisions of the Treaty include:

  • Relief from double taxation for Canadians who had either retired to the U.S. or owned $60,000 or more of property in the U.S.
  • Credit for Canadians against U.S. estate tax for up to $600,000 of U.S. assets
  • Application of U.S. estate taxes only to U.S. real estate assets where value of a Canadian’s worldwide gross estate is no more than $1.2 million

Still, the Treaty also requires that charitable bequests be funded from property subject to the U.S. estate tax in order for the taxpayer to file for a full deduction.