Giving Across International Borders, Part 1: Individual Giving

Clients with charitable intentions frequently seek to extend their philanthropy across borders, but good intentions can lead to unanticipated complexity and unintended consequences when it comes to tax and estate planning. U.S. citizens and U.S. income tax residents (“U.S. persons”) who seek to engage in charitable giving across international borders must plan carefully to maximize tax benefits and comply with the law.

Trends in Giving

Total charitable giving to charities based in the U.S. more than doubled from 2000 to 2023, rising from $203.45 billion to $557.16 billion. At the same time, the percentage of American households that give to charities has declined, from 66.2% in 2000 to 46.95% in 2020. Fewer households may be giving, but those that do are giving far more than in decades past, and increasingly they are giving internationally.

Giving Analysis Framework

In order to help clients understand the tax implications and legality of a proposed charitable gift, advisors first need to obtain answers to a few questions about the specifics. A framework like the below can guide this conversation:

• Who is giving?
  • An individual
  • A corporation
  • A trust
• Is the donor domestic or foreign?
• Who is the recipient?
  • A public charity, typically organized as a not-for-profit corporation
  • A private foundation (non-operating or operating)
  • A domestic “friends of” organization supporting a foreign organization
  • A donor-advised fund
  • A wholly charitable trust
  • A charitable split interest trust
  • A low-profit limited liability company
• Is the recipient domestic or foreign?
• When is the gift being made?
  • During life
  • At death
• What is being given?
  • Cash
  • Property

The Tax Considerations of Individual Giving

There are several ways individuals can give, and each comes with specific tax considerations.

Lifetime donations by domestic taxpayers for foreign activities. U.S. persons may claim a limited charitable income tax deduction for contributions to qualifying U.S. (not foreign) charitable organizations (IRC Sec. 170(c)), and the activities of a qualified U.S. charitable organization may be outside of the U.S. Another way to achieve cross-border charitable goals and income tax benefits is by donating to domestic “friends of” organizations that benefit a specific foreign charity. In order to be eligible, however, “friends of” organizations may not be a “mere conduit” for the funds, and they must have independent governance (i.e., not be under the control of the foreign organization). Finally, contributions may be made to a domestic donor advised fund that in turn may make grants to qualifying foreign charities.

Contributions by non-grantor trusts and estates. IRC Sec. 642(c) permits charitable contributions for U.S. domestic non-grantor trusts and estates. Unlike the individual income tax contribution requirements that limited deductible contributions to U.S. organizations, a deduction may be claimed for a contribution to a non-U.S. charitable organization, and there is no percentage-of-income limitation. It’s important to note that the contribution must be made “pursuant to the terms of the governing instrument” of the trust or estate.

Lifetime donation by foreign taxpayers to domestic organizations. A non-resident alien may claim a limited income tax deduction for contributions of effectively connected trade or business income to a U.S. charitable organization. However, there is no income tax deduction against the 30% tax on passive U.S. source income (fixed, determinable, annual, or periodical, known as “FDAP,” income).

Testamentary bequests by domestic taxpayers to foreign organizations. The estate of a U.S. decedent may claim an unlimited estate tax charitable deduction for bequests to qualifying charitable organizations, and these organizations are not required to be domestic. (IRC Sec. 2055.)

Testamentary bequests by foreign taxpayers to qualified charity. An estate tax charitable deduction may be claimed for bequests by non-U.S. persons of U.S.-situs property included in the decedent’s gross to a qualified charity. (IRC Sec. 2106 (a)(2).) This bequest must be made to a domestic corporation organized and operated for charitable purposes or to a charitable trust (domestic or foreign) if the bequest is to be used within the U.S. exclusively for charitable purposes.

Retirement accounts and life insurance beneficiary designations. An estate tax charitable deduction may be claimed for life insurance proceeds and retirement accounts payable to a qualifying charitable beneficiary. Qualified tax-deferred retirement accounts (IRAs, 401(k)s, etc.) payable to a qualified U.S. charity will also be eligible for an income tax deduction.

Tax Treaty Considerations

Tax treaties provide additional benefits for charitable giving to foreign organizations. 

Israeli charities. Under the United States–Israel income tax treaty, a contribution to an Israeli charitable organization is deductible if and to the extent the contribution would have been treated as a charitable contribution if the organization had been created or organized under U.S. law. To deduct contributions to an Israeli charity, the taxpayer must have income from sources in Israel. The deduction is also limited to 25% of adjusted gross income from Israeli sources (in addition to the general limitations on deductions).

Mexican charities. Under the United States–Mexico income tax treaty, a contribution to a Mexican charitable organization may be deductible, but only if and to the extent the contribution would have been treated as a charitable contribution to a public charity created or organized under U.S. law. To deduct contributions to a Mexican charity, the taxpayer must have income from sources in Mexico. General limitations on deductions also apply.

Canadian charities. Under the U.S-Canada income tax treaty, contributions to certain Canadian charitable organizations are deductible by U.S. taxpayers, subject to the U.S. percentage limitations on charitable income tax deductions. However, if the U.S. taxpayer does not have gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible.

U.S. estate tax treaties. The U.S has estate tax treaties with a limited number of countries. The U.S. estate tax treaties with France, Germany, Canada and Denmark provide for certain cross-border estate tax deductions.

With the help of a trusted advisor and some careful planning, individuals can maximize the joy, and tax benefits, of giving to the charities that matter most to them.

—

Do you have questions about your philanthropic giving plans? Please reach out to Suzanne Shier or another member of LP’s Trusts & Estates practice group.