Is it advisable to make a charitable bequest of a business interest as part of your estate plan? It depends, says TWG Estate and Tax Attorney Matthew Schippers.
Schippers recently published an article, “Minority interest discounts apply to charitable bequests,” in the Journal of Accountancy. In the article, Schippers analyzed Estate of Warne v. Commissioner, a Tax Court case where the decedent gifted limited liability company (LLC) membership interests to two charities. Upon her death in 2014, Miriam Warne left 75% of an LLC membership interest to a charitable foundation, and the remaining 25% of the same LLC to a church. The estate reported the full fair market value of the LLC in the gross estate of Warne’s estate tax return, with a fully offsetting charitable contribution deduction. The IRS issued the estate notices of deficiency for valuations of the gifted LLC interests, which the estate challenged in Tax Court.
The Tax Court held that Warne’s estate must include 100% of the LLC in the gross estate, but that the estate was entitled to a charitable contribution deduction equal to the respective discounted interests received by the church and the foundation. This outcome resulted in a 27.385% discount for the donation to the church, and a 4% discount for the donation to the foundation.
So, should you make a gift of a business interest to charity as a part of your estate plan? As the case shows, Schippers says, a taxable estate may not be entitled to a dollar-for-dollar charitable deduction for such a charitable bequest. To optimize the charitable deduction, the client may consider gifting other assets, such as cash, to charity.
Matthew Schippers received both his bachelor’s degree and his Juris Doctor from the University of Kansas. He received his LL.M. in Taxation from NYU School of Law in 2017 and was recently accepted into Class II of the Heart of America Fellows Institute created by the American College of Trust and Estate Counsel (ACTEC) Fellows to develop the profession’s future leaders in trust and estate law. Schippers is also a licensed Certified Public Accountant and is a member of the American Institute of CPAs. Schippers has previously written three articles summarizing cases for the Journal of Accountancy, including “Court holds refund claims were not duly filed.”
This article should not be considered legal advice. For specific questions about estate or tax planning, contact the Estate Planning and Tax attorneys of TWG.