New IRS regulations make leaving money to charity in a Will or Trust a little bit more complicated. The Will or Trust now needs to detail the source of the money that is to be used for charitable purposes. To qualify as non-taxable, that income source must have an independent economic effect, which basically means that the contribution cannot merely be to avoid paying income tax on the money.
The reason for the new rule is because of Charitable Lead Trusts. These are instruments that people have used to give income-tax free money to beneficiaries. The idea is that a charity or charities are the first beneficiaries of the Trust, but after they take their shares other non-charity beneficiaries can receive Trust assets with the same tax benefits as the charities. The new regulation is the IRS’ way of attempting to stop this practice.
If you have made charitable giving a part of your estate plan, you need revisit the plan and make sure that the source of the income is stated. If you do not, your heirs and beneficiaries could face large tax bills over a simple mistake. Schedule an appointment with your attorney to make sure that your plans account for the new IRS rules.
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