Charitable Deductions for Trusts
Two Rules Before You Write the Check
The trust can make charitable contributions, and those contributions can reduce the trust’s tax bill. But there are two requirements that must be met before the deduction is available: the trust document must authorize the gift, and the money must come from income, not principal.
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Rule 1: the trust document must authorize it
A trust can only claim a tax deduction for charitable contributions if the trust document (the governing instrument) includes language allowing the trustee to make charitable gifts. Without that authorization, no deduction is available under §642(c), regardless of how much income the trust has or how worthy the cause.
This catches some trustees off guard. You might assume that because individuals can donate to charity and deduct it, a trust can do the same thing. But the rules are different. For a trust, the IRS requires that the authority come from the trust document itself.
The good news: the authorization does not have to be specific to a particular charity. Broad language granting the trustee discretion to make charitable contributions is generally sufficient. If you are not sure whether your trust document includes this language, check with your attorney before making any charitable gifts from the trust.
Rule 2: the contribution must come from income
The trust can only deduct charitable contributions that come from gross income, not from principal (corpus). This is a fundamental distinction in trust taxation, and it is different from how individuals are treated.
If the trust earns $80,000 of income during the year (interest, dividends, rent, etc.) and contributes $30,000 to charity, the full $30,000 is deductible because it comes from income. But if the trust contributes $100,000 to charity and only has $80,000 of gross income, only $80,000 is deductible. The remaining $20,000 comes from principal and generates no deduction.
Worse, there is no carryforward. Unlike individuals, who can carry unused charitable deductions forward for up to five years, trusts lose the excess. If the deduction exceeds gross income, the extra is gone.
The advantages
Despite the restrictions, the trust charitable deduction has one significant advantage over the individual deduction: no percentage-of-AGI limits. Individuals can typically deduct only 60% of their adjusted gross income in charitable contributions (less for certain types of property or recipients). Trusts have no such cap. If the trust’s entire gross income goes to charity under the terms of the governing instrument, the entire amount is deductible.
How it affects beneficiaries
When the trust claims a charitable deduction, it reduces the trust’s distributable net income (DNI). DNI is the measure of how much taxable income passes through to beneficiaries on their K-1s. A larger charitable deduction means less DNI, which means less taxable income on each beneficiary’s personal return.
This is a legitimate planning tool. If the trust has significant income and the governing instrument authorizes charitable giving, a well-timed contribution can reduce taxes for both the trust and its beneficiaries.
Timing flexibility
If the trust didn’t make a charitable contribution during the year but realizes after year-end that one would have been beneficial, there is an option. The tax code allows the trust to treat a contribution made in the year immediately following the close of the taxable year as if it were made during the current year. The trustee must make the election on a timely filed return (including extensions).
This is similar to the 65-day rule for distributions. It gives you a second chance to use a charitable deduction to offset income you didn’t anticipate.
What to check before giving
- Read the trust document. Does it authorize charitable contributions? If not, the deduction is off the table
- Identify the source. Will the contribution come from income or principal? Only income qualifies for the deduction
- Check the trust’s gross income. The deduction cannot exceed gross income, and there is no carryforward
- Coordinate with your tax advisor. The timing and amount of the contribution affect DNI, which affects every beneficiary’s K-1
Frequently Asked Questions
Can the trust make charitable contributions?
Only if the trust document authorizes it. The tax deduction for charitable contributions by a trust (under §642(c)) requires that the contribution be made “pursuant to the terms of the governing instrument.” If the trust agreement doesn’t include language allowing charitable giving, the trust cannot claim a deduction for any contribution it makes. This is true even if the beneficiaries agree, even if the charity is well known, and even if the trust has plenty of income. The authorization must be in the trust document itself.
Does the contribution have to come from income?
Yes. The trust can only deduct charitable contributions that come from gross income, not from principal (corpus). If the trust uses principal to make a charitable gift, there is no tax deduction. This means that if the trust’s only income is $50,000 and it contributes $70,000 to charity, only $50,000 is deductible. The remaining $20,000 comes from principal and generates no deduction. Unlike individuals, trusts cannot carry forward the unused portion to a future year.
Are there any limits on how much the trust can deduct?
No percentage limits. Individuals face caps based on their adjusted gross income (60% of AGI for cash to public charities, for example). Trusts have no such limitation. If the trust has $200,000 of gross income and contributes all of it to charity pursuant to the governing instrument, the entire $200,000 is deductible. The only limit is that the deduction cannot exceed gross income, and there is no carryforward for any excess.
How does a trust charitable deduction affect the beneficiaries?
It reduces the amount of income that flows through to beneficiaries on their K-1s. The charitable deduction is taken in computing the trust’s distributable net income (DNI). Lower DNI means less taxable income allocated to beneficiaries. In effect, the charitable deduction benefits both the trust and the beneficiaries by reducing the total tax on the trust’s income.
Related services
Trust Tax Return (1041)
The return where the charitable deduction is claimed and its effect on DNI is calculated.
The 65-Day Rule
A similar timing election for distributions. The charitable contribution election works the same way.
Beneficiary K-1
The charitable deduction reduces DNI, which changes what each beneficiary reports on their personal return.