Deducting a trust’s charitable donations

Posted On: NOVEMBER 2021

If you’re charitably inclined, it may be desirable to donate assets held in a trust. Perhaps you’re not ready to let go of assets you hold individually. Or maybe the tax benefits of donating trust property would be more attractive than an individual donation. Before making such a donation, it’s important to understand the differences, for tax purposes, between individual and trust donations and the circumstances under which donations by a trust are deductible.

Tax treatment of individual donations

Generally, you’re permitted to deduct charitable donations for income tax purposes only if you itemize. (Although COVID-19-related legislation established a $300 charitable deduction for certain cash gifts by non-itemizers in 2020 and 2021.)

Itemized charitable deductions for cash gifts to public charities generally are limited to 50% of adjusted gross income (AGI), while cash gifts to private foundations are limited to 30% of AGI. The Tax Cuts and Jobs Act increased the limit for cash gifts to public charities to 60% through 2025 and COVID-19-related legislation increased it to 100% for certain cash gifts to public charities in 2020 and 2021.

Noncash donations generally are limited to 30% of AGI for donations to public charities and 20% for donations to private foundations. If you donate appreciated long-term capital gain property to a public charity, you’re generally entitled to deduct its full fair market value, but with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property. Deductions for ordinary income property (including short-term capital gain property) are limited to your cost basis, regardless of the recipient.

Tax treatment of trust donations

The discussion that follows focuses on non-grantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual donations. Also, this article doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.

Making charitable donations from a non-grantor trust may have several advantages over individual donations, including the ability to claim a charitable deduction even if you don’t itemize deductions on your individual income tax return and to deduct donations to foreign charities. And a trust can deduct up to 100% of its gross taxable income, free of the AGI-based percentage limitations previously discussed.

In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. For example, in 2021, trusts reach the highest (37%) tax bracket at only $13,050 of income.

If you’re contemplating a charitable donation from a trust, there are a few caveats to keep in mind:

  • The trust instrument must authorize charitable donations.
  • The donation must be made from (that is, traceable to) the trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust.
  • Unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.

Special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts (generally, those created on or before October 9, 1969).

Making the most of charitable deductions

If income limits or restrictions on itemized deductions have hampered your ability to deduct charitable donations, consider making donations from a trust. We can help you determine whether this is an option and ensure that you’re getting the most bang for your charitable buck.

© 2021