What Are the Requirements for a Trust Charitable Deduction?

Trusts have their own set of tax rules for charitable giving that differ from those for individuals. A charitable deduction can lower a trust’s taxable income, which is beneficial because trusts face compressed tax brackets that reach the highest federal rate at lower income levels. The process for claiming a deduction involves more than simply writing a check to a qualified organization. The rules ensure that the donation aligns with the trust’s intended purpose and is sourced from the correct pool of funds.

Core Requirements for the Deduction

The foundation for a trust’s charitable deduction is in Internal Revenue Code (IRC) Section 642. This section establishes two primary conditions for a contribution to be deductible. The first is that the donation must be made “pursuant to the terms of the governing instrument,” meaning the trust agreement or will must grant the trustee the authority to make charitable distributions.

If the trust document is silent on charitable giving, the trustee cannot make a deductible donation. The document does not need to mandate contributions, but it must contain language that permits them. A trustee’s general discretionary power is often sufficient if it includes the ability to distribute funds to charities, but this authority must be present in the original document.

The second requirement is that the contribution must be paid from the trust’s gross income, such as interest or dividends, rather than the principal. For example, if a trust has $500,000 in principal and earns $20,000 in dividend income, a $10,000 donation must be sourced from that income to be deductible. If the trustee makes the payment from the principal, the trust cannot claim a deduction, so the trust’s accounting must clearly show that the amounts paid to charity originated from its gross income.

The Special “Set-Aside” Deduction

The tax code also provides a “set-aside” deduction, which allows certain trusts and estates to deduct gross income that is permanently designated for future charitable use but not yet paid. The amount must be definitively earmarked for a qualified charity. This provision is an exception to the general rule that requires an actual payment to be made during the tax year.

Eligibility for this deduction is limited, primarily applying to decedents’ estates. For trusts, it is restricted to those created and made irrevocable on or before October 9, 1969. This historical cutoff was part of the Tax Reform Act of 1969.

For the few trusts that still qualify, the governing instrument must contain instructions to permanently set aside specific income for charitable purposes. Because most modern trusts cannot utilize this provision, they can only deduct charitable contributions that are actually paid out.

Limitations on the Deduction Amount

While a trust’s charitable deduction can be unlimited, restrictions apply if the trust has Unrelated Business Income (UBI). Under IRC Section 681, UBI is income from a trade or business regularly carried on by the trust that is not substantially related to its exempt purposes. An example would be a trust that owns and operates a manufacturing business.

If a charitable contribution is made from the trust’s UBI, the deduction is subject to the same percentage-of-income limitations that apply to corporations or individuals, rather than the unlimited provision. The calculation requires the trustee to allocate the contribution between the trust’s regular investment income and its UBI. Any portion of the donation sourced from UBI is subject to the more restrictive deduction limits, which can reduce the overall tax benefit.

Reporting the Deduction on Form 1041

A deductible charitable contribution must be reported on Form 1041, U.S. Income Tax Return for Estates and Trusts. The details of the deduction are calculated on Schedule A of this form. This schedule is where the trustee provides a breakdown of the amounts given to charity during the tax year.

On Schedule A, the trustee enters the total amount of gross income paid to charitable organizations, including any qualifying set-aside amounts. The form requires adjustments for any tax-exempt income that was part of the contribution, as no deduction is allowed for donations made from non-taxable income.

After completing calculations for items like capital gains allocated to the contribution, the final deductible amount is determined on Schedule A. This total is then carried over to the main Form 1041 and entered on the line for charitable deductions, reducing the trust’s taxable income for the year.