0:00 Who are you? [music] And where are you going? [music] What do you want? Hello and welcome to Trust and Estates Weekly. I'm your host, Kevin Bemel, and [snorts] I'm here every Monday at 10:00 a.m. Pacific time. And it seems with my microphone showing at the top of my screen, I don't know how I keep adjusting it and it keeps it keeps showing there. What what what what is a
0:36 host to do? So uh today uh on Trust in Estates Weekly, I'm going to be talking about making charitable donations as part of the administration of a probate. So I've I've previously talked about charitable charitable donations as part of estate planning. This is when the deedent is already dead and either there is or is not or both. Um there either is in the will specific
1:12 bequests that the deedent wanted made or maybe there isn't any but for various reasons it seems like a good idea or maybe both. Okay. So we're going to talk about those various uh circumstances. So, I'm now a as you know because I I' I've mentioned this many times on this show. Uh probate law varies from state to state. Okay. So, I practice uh primarily in California, although I've
1:47 done work in other states uh including Alabama, Virginia. Um seems like there's one or two others that aren't immediately coming to mind. But in any event, I'm going to be talking specifically about California in terms of the details of this. But conceptually, I think that what I'm going to talk about will apply to all 50 states plus the various uh territories. So the first issue for any personal
2:22 representative and and again a personal representative is the executive or executed under the will or it's an administrator appointed by the court. All of those together any of those names all fall under the term uh the personal uh representative. So the personal representative when making donations is either acting under the will or is acting under a relevant uh part of the
2:57 probate code in the case in in the state in which the probate is taking place. In California, that's probate code section 16,000 through 16,60. Okay? So if you want to look up the specifics, you can do that. Now if the will specifically makes specific charitable bequests. So then once the will has been submitted for probate and the executive or administrator the personal representative has been appointed. So then the will has been accepted by the
3:33 probate court and now um it the the personal representative has the authority to fulfill the terms of the will. So there's no additional uh court approval necessary to make specific charitable requests that are in that will. Okay. Now, uh there may or may not be uh the necessity to get court approval for charitable charitable donations that the
4:10 personal representative wants to make that are not specifically in the will. I'm going to talk about I'm going to talk more about that um as as the show progresses. Uh but suffice it to say that if the personal representative makes charitable contributions that are not a specific that are not specifically in the will, that's one case. or makes uh charitable contributions that are in the will but that create a
4:49 situation where for example a secured creditor cannot get fully paid or paid at all. Either one of those could lead to the personal representative being held personally liable by the heirs or the creditors. So depending on the size, the scope, the context of the charitable charitable contributions, okay, it may make sense
5:25 for the personal representative to get court approval before making those contributions. Okay? And by the way, even when a will specifically says that the executive or administrator can do a specific thing that does not prevent the personal representative from seeking a direction of the court i.e. approval of a particular act. Okay. One
6:02 way, one way that personal representatives avoid personal liability in in make is making sure before they take an action that the court approves of that action. And I'm going to I'm going to talk about that uh I think a little bit farther down. Let me see. Let me just look at my notes here for a minute. Make sure I'm going to cover it. Yeah. I'm going to talk about court approval and and how that process works. You can see how it avoids personal liability on the part of the administrator. Okay.
6:38 So, you're you're the personal representative of an estate, okay, and you're wondering about charitable contributions. So, the first thing to do, if you haven't done so already, is to read the will. So if there are specific charitable requests in the will so part of your administration should be seeing to it that those contributions are made. Now that will typically happen
7:13 at the time the assets of the estate are distributed. Okay. So typically you you know you go you gather the assets you figure out the debts um if assets have to be sold in order to be able to pay debts or or whatever that's done. Okay. And then the the closing of the estate of the probate essentially entails making a a petition to the court saying, "I'm going to distribute the following funds to the following people or
7:49 organizations." And having done that, the estate will close essentially. Okay? It's a little bit of an oversimplification, but but that's essentially how it works. And so there's no need to make a a separate um filing for charitable contributions. Certainly if they're in the will, there's no reason to. But even if they're not in the will, if you're making it part of the overall plan for the final distribution, so the court is going to approve that in
8:25 any event. Okay? And so you don't have to worry about getting prior approval. The when you when you would might want to get prior approval is when you're going to make early dis early distributions uh for charitable contributions. Okay. So, generally speaking, California law, the probate code, requires that charitable gifts not interfere with the payment of debts and expenses of the estate. So, I did a I did an episode I think a few
9:01 weeks ago talking about priority of payments. So, number one priority of payment is the costs for administrating the estate. That's the the legal costs, the costs to the executive or the personal representative, whatever it's so those costs get paid first. Next, get paid secured debts and then unsecured debts, right? So, there's there's a list and you and if um you can go back and watch that episode and and you can see there's seven or eight I think uh items on this list of priorities. So if making
9:39 a charitable contribution, let's say it's a very small estate. Okay. So right now I'm I you know as a favor to my my older sister Mara, she asked me to look into the administration of an estate in uh Las Vegas, Nevada or in Nevada. And the way the uh personal representative was talking about it, my my understanding was, well, there's quite a bit of money in there. But when I checked out the actual court documents, okay, the total value of the
10:14 estate is under $75,000. It's a ve it's a small estate no matter how you cut it, right? And so in an estate like that where the cost of administration could easily be a third or even a half of the value of the estate. To make charitable donations uh before there's been a final accounting would probably be a big mistake because they could hamper the estate's ability to pay the cost of administration and then any debts. Okay.
10:52 So that's not to say if you have a largest state that it's okay to make charitable contributions willy-nilly. Only that one of the things to be most careful about is in making contributions are you imp is the personal representative impeding the the estate's ability to pay uh people and and and organizations that have a higher priority. Okay. So, um, like I said a moment ago, if there's any question
11:27 about whether donations should be made, the personal representative can seek instruction from the court. Now, if the personal representative ignores these issues and go ahead goes ahead and makes them, the court could invalidate the donations, forcing the per personal representative to in essence claw them back from the organizations that received them. And if he can't, he could be held personally liable. Okay? So,
12:03 this is why it's so important to be careful about how you make uh personal uh uh charitable donations. Okay. [snorts] So, generally speaking, uh the California Probate Code requires that uh charitable donations be made after paying debts, administrative expenses, taxes, and debts. Okay? So if it's a very large estate that's subject to estate taxes, okay, so then
12:39 to make charitable donations that would then preclude the estate from being able to pay the estate taxes. Again, big mistake, right? Um right. And nothing is sure but death in taxes, they say. Well, certainly uh you know in the in the administration of an estate that adage is is absolutely true. The IRS is going to get its estate taxes come hell or high water. So um you know if if those
13:15 priority of payments are in essence violated so then there there's likely to be a problem. Okay. Now, there is in California, there is no estate tax, so you don't have to worry about paying a California estate tax, but there are a few states that do have an estate tax on top of the federal estate tax, and they don't necessarily follow the estate tax exemption that that federal tax law has. So right now it's
13:51 about I think around $15 million 14 or $15 million. If it's a married couple it's going to be double that 28 to $30 million. You can see that in a state that's going to be subject to federal estate taxes is pretty large. But that doesn't mean that the state that a state is state tax law. It you know necessarily has those huge exemptions. So, it's something to examine very carefully before deciding as a personal representative before
14:26 deciding whether you're going to make those kinds of uh charitable donations. Okay, let's take a break and I'll be right back. When life brings unexpected changes, managing inherited property shouldn't add to your stress. Magnum Properties specializes in probate and trust real estate management. We handle the complexities while you focus on what matters most. From property maintenance to tenant relations, from legal compliance to maximizing value, we're
15:02 your trusted partner through every step. Magnum Properties, Inc., turning property challenges into peace of mind. Call us today at 213-264-4396 or visit magnumprops.com. Okay, this is Trust and Estates Weekly. I'm your host Kevin Bemel and we're talking about making charitable donations when an estate is in probate as distinguished from doing so or or
15:37 setting them up as part of the estate tax estate uh planning process. Okay. All right. So talked about whether uh a will um specifically uh [clears throat] um sets up uh bequest to charitable organizations or whether they're um being considered on a discretionary basis by the personal representative and and and the issues attended attendant to that like that there is a priority of payments and if giving the
16:12 the charitable contributions is going to impede the payment of administrative expenses or taxes or debts. That could be a problem. Okay. So, having said that, there are uh tax considerations when making charitable contributions essentially on behalf of an estate. And this is something that uh you should discuss with the accountant for the estate and and potentially the uh the
16:47 lawyer and the heirs um even before you might consider applying to the court uh for approval. So, uh, so the the, uh, Internal Revenue Code, um, does permit, um, or does I shouldn't say does, it's not that it permits or doesn't. Um, the Internal Revenue Code has some benefits to an estate donating, making charitable donations. Okay. Now, uh whether those
17:25 donations are cash, property, stocks and bonds, uh you know, it could be artwork, could be real estate. Okay, so how all of that is going to work can get complex. Okay, it's more than just an individual uh making a donation, right? These days with the um with the um standard exemption on income taxes so high, most of us don't itemize charitable contributions anymore. So we either give
18:00 them because we want to or we don't because we don't want to. Now when we're talking about an estate, so there there really isn't any exemption to speak of. And so the ability of charitable contributions to reduce tax liability uh can be can be significant. The estate tax although it's graduated it's essentially 40%. Right? So it's it's high it's higher than the individual uh than the top individual uh tax bracket
18:37 income tax bracket. So this is again something. Now, if there's specific requests in the will and there's sufficient um there's sufficient um uh assets in the estate. So then whether they make tax sense or not is largely irrelevant. The the deedent has directed that these contributions be made and so that's really the end of it. But if there's if if as a personal representative you're considering discretionary
19:12 charitable donations. So then this is something that needs to be planned out. This is nothing this is not something to do on as one of my friends says real estate time which is get it done tomorrow at the at you know at the latest kind of thing. No not at all. It's something to be carefully thought through and something to um you know to do in in in consultation with the various u experts on you know taxes etc and potentially again even socialize with
19:47 the heirs. Okay. So there not only do the donations have to be made but they have to be properly documented and and they have to be presented in you know the various tax returns. Now, one of the things that I that is I think escapes uh people's attentions when it comes to taxes and probate is uh that the um the estate if if it's large enough, as I mentioned before, we'll need to file an
20:23 estate tax return. But if the estate is going to cross tax years, meaning it's around for more than one tax year, it may also need to file an income tax return. Okay? So, I'm dealing with a large estate. It's a $50 million estate. And in last year, 2024, we filed an estate tax return. Actually, I take that back. We filed the estate tax return uh this year. We we got an extension on it.
20:59 Uh but in addition to that, a tax an income tax return had to be filed for the estate itself at for 2024 and it'll have to be done again for 2025. So the estate exists as an entity. That's why you have to get a federal uh tax ID number for an estate. And if the estate is generating income, it has to pay taxes on that income. Okay? The IRS doesn't want to miss out on on what it
21:35 it's entitled to. Okay? So again, if you're going to make charitable contributions, they need to be looked at as part of the broader estate uh broader tax planning that's being done for the estate both on the estate tax side and potentially on the income tax side. All right. So this is how by by carefully planning this is how uh as the personal representative you can ensure that the estate gets the maximum benefit out of
22:12 making those contributions and and also show the heirs why it makes sense to to do them in the way that you're suggesting. Okay. This follows closely on this issue of court approval. If charitable donations, maybe part of the plan is that the donations be made before the before the probate closes, right? And so in that case, depending on the context, you you as the personal representative may seek court approval
22:47 to make those essentially early u charitable donations. If that's if that's what you're doing, perhaps one of the justifications is that the estate will save considerable sums in taxes and so this is why the donations are being made before the probate closes. Okay. So, while here in California, uh, probate code section 16,60 allows for charitable gifts that are not
23:23 specified in the will. So, it's still the probate code still seeks to uh protect the heirs and so they may require the court a court approval before they're made. Okay. So, and I mentioned this a little while ago, court approval protects the personal representative from potential personal liability. So, the court approval process typically begins with the personal representative
23:59 filing a petition with the probate court. Okay? And the petition may be for early distribution of assets to make charitable donations. Okay, that that may be whatever that may be what the petition, you know, is for. Okay, there's lots of reasons why the personal representative may petition the court in in this on this particular topic. It would be a petition to make early distribution for charitable gifts. Okay. And in that petition, it will it will state or need to state why the
24:35 personal representative thinks that this is a proper course of action. And as I mentioned a few minutes ago, it may be that the estate is going to save significant money on taxes. Okay? And so, especially if the donations have are specific bequaths in a will. Okay? Excuse me. It may benefit the estate by reducing tax liability to make them early, not waiting for the probate to close. Okay? And that may be a good justification
25:11 for submitting this petition seeking court approval. Now, as part of the petition process, anyone who is an interested party, that will typically be the heirs, it could be creditors, there could be other interested parties, they're going to receive notice of that petition. Okay? Once they receive notice, they now have an opportunity to number one do nothing in which case the court is will you know do whatever it's going to do without any input from the interested
25:48 party. Number two, the interested party can essentially file uh that that they're in favor of the petition. Okay. Now, by the way, sometimes as part of preparing the petition, the uh the lawyer for the personal representative will seek um documents from various interested parties that demonstrate that they that they approve or concur with what the personal representative is seeking. Okay. So,
26:24 that that could be part of the original petition in essence. it may but the the flip side of that is that uh interested parties can object to the petition. So if there's a creditor who thinks that by making these charitable contributions early okay that uh it may impede the estate's ability to pay the debt. So they might um they might uh they might object to the petition. Now
26:59 merely because someone objects to the petition that doesn't mean that the court will automatically reject it. Okay. So the court is going to look at the various issues and make a decision. Okay. So, so one of the aspects again going back to this idea of a creditor is if a creditor is is saying is objecting to a petition to make an early distribution for charitable gifts. If they're objecting to that because they think there won't
27:34 be enough money to pay the debt, one of the ways of sort of anticipating and therefore in essence making that objection irrelevant is to show how making these distributions now will actually leave more funds later because of the reduction in tax liability in order to pay debts. Okay. and show that that indeed the estate will be able to pay the debts of the estate even after having made these charitable
28:09 contributions. Okay, number one that may forstall a creditor objecting. Number two, if a creditor does object, the court may look at that and essentially, you know, disregard the objection as being irrelevant or untrue because the numbers are there in the petition showing that indeed the estate can afford to make these charitable donations but also pay the debts. Okay. Uh so then typically there will be a hearing
28:44 on the petition okay where various interested parties can speak their case and then the judge will make a decision. Sometimes the judge will decide right at the hearing. Sometimes the judge will take it under advisement and issue a a a decision later in the day or even uh some days later. Okay. So, uh, you know, there's no way to say in in in general whether a court would approve or reject such a petition. It's going to depend on the specifics of the situation and and
29:21 you know, just that that that just has to be uh figured out. Okay, so let's take another break. Probate and Trust TV, your curated source for the most useful and insightful content on estate planning and trust and probate administration. Featuring standout professionals like Bill Gross, Paul Bralet, James Cunningham, and yours truly. Whether you're a lawyer, accountant, real estate professional, or working on your own succession plan, this channel helps you
29:58 quickly find the clearest, most practical content YouTube has to offer. Subscribe now to Probate and Trust TV. Spend more time learning, less time searching. Okay, and we're back again with Trust and Estates Weekly talking about making charitable donations while an estate is in probate. So, um, following up on our discussion of of when and and how to make them and how to make sure that the personal representative doesn't run a
30:33 foul of u priority of payments and such. So um there are you know different types of donations that can be made. Uh the simplest of course is a cash donation where the uh the the personal representative essentially sends a check to a some sort of nonprofit organization and and that's you know that's kind of really it. Now, uh there will uh you know, if if if we're talking about a donation that's being made to reduce tax liability in
31:10 California, that would be only on well, I should say the estate tax liability, that'll only be on the federal side. on the income tax side. So if the estate has to file an income tax return, so that's going to be for both federal and state level in California. Okay. So in any event, documentation of the contribution is necessary. Um you know obviously a copy of the check should be kept and uh 501c3 organizations
31:45 charitable organizations are required to issue receipts so that receipt should be retained as well. Okay. Now if some other type of donation is being made it's a donation of property real estate art cars horses whatever it is. Okay. So, first of all, in order to establish the amount of the donation, an appraisal may be required. A current appraisal, in other words, a an appraisal as of the date of the donation may be required.
32:22 Sometimes charities will bear the cost of making that appraisal since they're receiving the donation. It's often times worthwhile for them to do that. And in fact, they may h they may have an appraiser who because it's being appraised for charitable gift purposes gives them a lower fee than someone making the donation. Okay. So, this is something to look into. California Probate Code 8800 um show indicates that such an appraisal um may be necessary.
32:59 um and and may be a part of the proper transfer of title. Okay. So so there you know may need to be some kind of mechanism. Um stocks and other securities they may not require an appraisal per se but they may require some kind of statement that shows their value as of the date of donation. Okay. And like any kind of appreciated asset whether it's stocks, bonds, real estate, okay, there again may be some kind of
33:35 greater benefit to the estate in donating it than there is in uh uh I'm sorry there may be additional benefit in donating it. Okay. So, one of the benefits of donating appreciated property is typically one gets a tax deduction for the appreciated amount, okay, without having to pay taxes on the gain, whether it's a short or a long-term capital gain. Okay? The same may be true for an estate, either on the
34:11 estate tax side or the income tax side. But you can see right away that these are getting very complicated. And so this is why you need to get proper advice from an accountant. Not just an accountant who knows just regular income taxes, but an accountant who routinely works with estates, knows estate tax law, knows estate income tax law, and can make sure that all of these things are being handled correctly. Okay? And uh so these are the kind of things and
34:47 this is why earlier I said that you really need to plan these out carefully. If there does need to be an appraisal that probably is something you're going to want to get before you make the donation. Okay? And it can take some time if appraisers are b busy. So you got to get all those things worked out. Okay? Finally, the th any any sort of charitable donation needs to be documented. Okay. So, uh detailed records um need to be
35:25 maintained as part of being able to make a proper final accounting at the time the personal representative seeks to close the probate. Okay. So again, this may this may mean a copy of the check, copy of the receipt from the charitable organization, copies of appraisals. Okay, it should all be put together in a nice little package. I know I keep all my records on computer as PDFs. Okay, but um I'm I was just putting together a package for
36:00 somebody earlier uh this morning before the show. Um, in this case, it wasn't for an estate. It was for a a media project that a friend of mine uh asked me u asked me to help him with. And you know, it's I'm putting everything all together very neatly. So when I email it off to the person uh receiving it, it's all just very clear. Um you know, the recordkeeping is all very clear. So the same thing needs to be done in recordkeeping uh throughout the administration of an estate but in
36:37 particular in this case for making charitable donations. Okay. if there uh was a a petition made uh to seek court approval for that charitable donation and the petition was approved that should be part of the records for that particular donation. Uh again when I keep my records of of court of court proceedings for an estate I keep them divided up by the purpose of a particular court proceeding. So, if it's a uh if it's a confirmation of sale of
37:15 real estate, for example, that's that's there's a file for that. If there's the original nomination of me as the administrator, there's a separate file for that. If there are advances advances taken by the heirs, so I have a file for those advances. If there's a guardian adm appointed by the court on behalf of one of the heirs, there's a separate file for that. So there should be a separate file for each uh charitable donation and it should include any court proceedings that were a part of making that
37:52 charitable donation. Now by the way if the court uh does not approve a charitable donation that should be kept as a record as well. Okay. and and if let's say for some reason there's a bequest in the will for a particular charitable contribution but the personal representative looks at it and says wow if I make this I'm not going to be able to pay the debts of the estate I'm not going to make that charitable donation and let's say that
38:29 the charity okay was pressuring the the personal repres representative to give them what they view as their money, right? That's so often how people look at an estate. It's my money. The fact of the matter is, no, it's the estate's money. It's not your money until the estate distributes it distributes it to you. Okay? So in a case like if I were faced with a case like that, I might file a petition with the court to deny a bequest in the
39:06 will for the following reasons. Okay. And I would document that it's unlikely that there is sufficient assets in the estate to make such a contribution. Okay. and that will settle it sort of once and for all. Or I might file a a petition for instruction. Uh essentially getting the court's direction that I may not make that contribution until the final accounting is filed and
39:43 the probate is closed. And then that sort of denial or at least temporary denial of my ability to make that charitable contribution, I would send a copy of the of the court's ruling to the charity to get them to back off. Okay? Especi especially if it's a large amount of money and it's going to be uh a long time. the the the estate's going to be in probate for a long time and I'm concerned that the charity is going to initiate some kind of legal proceeding
40:20 against the estate, I may seek to preempt that and hold control of the matter by being the one to file a petition dealing with that particular issue. Okay? Not saying I absolutely would, but just it would be something that I would certainly consider in a case like that. Again, it's important to keep a full record of all of the issues surrounding that matter. So, if there were ever any question as to whether it were handled correctly, uh I as the personal as the
40:55 personal representative would be able to show to a court, look, you know, here here's all the records. Here's why I did what I did. And you know, your honor, sanction the other side for dragging me into court and costing the estate or me personally legal fees and costs because this was all handled appropriately. Okay. Uh, another reason for keeping good documentation is so that the heirs understand what's going on. Okay. So in the final analysis the estate is being administrated
41:30 for the benefit of the heirs. Now sometimes an estate turns out to be insolvent and so the heirs are not going to get anything. Okay? And and and so that's why it's in some ways even more important to make sure that proper records are kept and that the errors are kept informed. So as so again it's to in essence preempt they're trying to make a claim that the administrator the per personal representative did something wrong and ought to be held personally liable. Okay. And then finally keeping
42:05 proper documentation um if if there if the estate is subject to estate taxes. So almost for sure it's going to go through a level one audit but that may not be the end of it. Okay. the the estate may not pass the level one audit and then it may start requesting the IRS might start requesting additional documentation and so you want to have that documentation available in order to sustain the case you're making from a tax perspective. Okay. And the same is true for an estate
42:40 that's subject to income taxation. Okay. the IRS or the state taxing authority may want additional information as well. So, these are the issues to consider when making charitable donations or considering making charitable donations on behalf of an estate in probate. And u again like with so many things the personal representative the executive the administrator they have administrative
43:16 authority. Uh but unless the administrator is also a lawyer and for example I am not as you know. So it is sound administrative procedure to make sure that a lawyer is examining these various issues to to ensure that the personal representative is complying with the law. likewise to have an accountant involved to make sure that not only are the numbers being handled correctly, but it's a second and sometimes uh accountants, especially
43:53 accountants who specialize in in estates, they oftentimes know more about um internal revenue code uh um uh issues and and state tax code issues than a probate attorney does. Okay? So, administrating a probate is is a team sport as I've mentioned before and and it's best handled in that way. Okay. So, if you have any questions, thoughts, criticisms, etc. Links to uh links to
44:29 social media will be in the show notes after this episode posts on YouTube. So, I encourage you to post them there. You can if you have something specific, you can uh my email address will be there as well. Uh I haven't mentioned this for a while, but feel free to email me with your specific questions or private questions. However, I will not answer them unless they're within my realm of knowledge. So if they're a legal or a tax matter, I will be happy to refer you to a qualified professional. But uh I
45:04 won't be answering that question uh directly. Okay, so that's the show for today. Tomorrow at 10 a.m. is my show, Business Lessons from the Military. Wednesday at 10:00 a.m. is my show, um people making money. Um those those times are uh Pacific uh Pacific time. And uh let me just see. Yes. And also this week on Thursday at 5:00 pm is my every other week show uh Jiggers's Place where we'll have a cocktail and a schmoo
45:40 and talk about all the sort of non-financial related aspects of life. So I thank you for joining me today especially my live viewers. Wishing you a wonderful rest of the day and signing off as I always do. Marie darling, you are my bell. Courage at all times, my friends.