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Aug 1, 2008 12:00 PM
Tax Law Update
Provisions regarding tax character of distributions to charity must have a non-tax economic effect. The Treasury Department has issued proposed regulations (NPRM REG-101258-08, June 18, 2008) under Internal Revenue Code Sections 642(c) and 643 regarding the tax consequences of an ordering provision in a trust, will or local law that attempts to determine the tax character of amounts paid by a trust or estate to a charitable beneficiary.
An estate or trust receives an unlimited income tax deduction under IRC Section 642(c) for charitable contributions made pursuant to the terms of the governing instrument. When determining whether an amount paid to a charitable beneficiary includes particular items of income not included in gross income, such as tax-exempt income, Treasury Regulations Sections 1.642(c)-3(b)(2) and 1.643(a)-5(b) provide that the governing instrument's provisions will control if they specifically state the source from which amounts are to be paid, for purposes of the charitable deduction and distributable net income purposes, respectively. Otherwise, the amount distributed is deemed to consist of a proportionate amount of each class of the estate's or trust's items of income.
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