On February 18, 2021, the Tax Court issued Warne v. Commissioner, TC Memo 2021-17, a case that addressed, among other issues, an estate tax charitable deduction. A decedent bequeathed 75% of a single-member LLC interest to a family foundation and the remaining 25% LLC interest to a church. The Tax Court agreed with the IRS assertion that the amount of the charitable deduction should be discounted to reflect the reduced benefit received by the two charitable donees as a result of there not being outright ownership of the bequeathed property, rather than accepting the taxpayer’s assertion “that discounts are inappropriate and would subvert the public policy of motivating charitable donations.”

The amount of the discounts was not litigated, because before trial the parties stipulated that if the court determined that discounting was appropriate, the discounts were 27.385% for the 25% interest bequeathed to the church and 4% for the 75% majority interest bequeathed to the family foundation. Understand what occurred in Warne – the asset being split was included in the gross value of the estate’s assets at its full fair market value; however, the charitable deduction was less than such value, even though 100% of the asset was given away to charity. The net result – a residual taxable amount in the estate equal to the aggregate discounts.

Note, however, that in many family situations, it should be easy to structure the charitable transfer in a way to accomplish the desired “split” result without a discount on the amount of the estate tax charitable deduction. Instead of leaving 75% to the family foundation and 25% to the church, the decedent could leave 100% of the property interest to the family foundation, and the family foundation then could make a transfer of the 25% interest to the church.