SEPT. 1, 2000

Estate Talk
IRS Allows Charitable Deduction for Compromise Agreement

The IRS has ruled that the transfer of shares of a trust’s residue and other property to a charity under a compromise agreement will qualify for an estate tax charitable deduction.

The decedent had executed a will leaving property to a charity and had also left shares of the residue of a trust to the same charity and 10 others. Later, he became dissatisfied with the charity and executed a codicil to his will that amended the trust to eliminate all gifts to the charity. The codicil, which was drafted by a principal officer (not a lawyer) of the decedent’s family corporation, devised the property and the trust shares to the decedent’s brother and his issue.

After the decedent’s death, various issues arose with respect to the validity and interpretation of the codicil and the trust amendment. The charity contended that the decedent had not intended to give beneficial ownership to the brother, but rather to give the brother power to designate the charitable recipients of the property and trust shares.

To settle the dispute, the brother and the charity executed a compromise agreement, under which the trust amendment was declared invalid. Also, the codicil was interpreted to grant the brother power to designate the charitable recipient of certain properties. Certain other properties will be passed to the brother outright.

The IRS ruled that the portions of the decedent’s property passing under the agreement to charitable beneficiaries will qualify for the estate tax charitable deduction under § 2055.