Real Estate Gifting Realized: Retained Life Estates
This sixth article in a series on
real estate gifting issues covers retained life estates.
first five articles cover options when donating real estate, outright donations
and bequests, bargain sales, charitable gift annuities, and charitable
real estate professionals and their clients should consider all options when
discussing the charitable donation of real property. Real Estate Gifting Realized, a new
program launched by the CCIM Foundation, facilitates the donation of real
estate to charitable organizations. A donation may be made directly to the CCIM
Foundation or the Foundation can assist with the donation to a chosen charity.
Retained Life Estate
retained life interest, or retained life estate as it is commonly called,
allows a donor to claim a charitable deduction at the present time for the gift
of the remainder value of real property donated to charity. The transfer of a
personal residence, second home, or farm qualifies for a retained life estate. Giving
real estate during one’s lifetime may simplify the estate settlement process so
that executors are relieved of costs, expenses, and possibly delays in the sale
and transfer of real estate upon the donor’s death. Estate taxes may also be
reduced by removing the property from the taxable estate.
charitable income tax deduction for a retained life estate is an amount equal
to the net present value of the remainder interest contributed to charity. The
computation is performed under guidelines in Internal Revenue Service
regulations based upon, among other things, the fair market value of the
property on the date of transfer, its estimated useful life and salvage value,
the term of the agreement, and a defined federal rate.
retained life estate allows the donor to deed property to a charity and reserve
the right to live in or use the property for a term of years or life. Rights
and responsibilities between the donor and the charity must be documented in a
life estate agreement. The donor must maintain the property, pay property taxes,
insure the property against loss and liability, repair the property if damaged,
and avoid placing liens or encumbrances on the property without the permission
of the charity. In retaining rights, the donor also has the option to lease out
the property for a source of income or sell the remainder of the life interest
to the charity for a lump sum. The
agreement should also permit the charity access to inspect the property from
time to time.
some instances, it may be possible to combine the retained life estate with a
charitable gift annuity to generate monthly cash flow. Therefore, this is
something that is sometimes evaluated by a donor’s financial adviser as a way
to generate cash flow in lieu of a reverse mortgage.
considering a retained life estate, donors should discuss the pros and cons
with their advisers. The rules on charitable deductions to qualified charities
are very detailed and require review at the time a charitable donation is
contemplated as the rules may change or be impacted by current tax court
decisions and case law.
Stark Hood, JD, CFP, is president of the Hood Group, which provides consulting
services to business organizations and foundations. She currently serves as a
consultant to the CCIM Foundation’s Real Estate Gifting Realized Program.
Contact her at firstname.lastname@example.org. Learn
more about the Foundation’s gifting program at www.realestategifting.org.