CCIM Feature

Real Estate Gifting Realized: Retained Life Estates

This sixth article in a series on real estate gifting issues covers retained life estates. The first five articles cover options when donating real estate, outright donations and bequests, bargain sales, charitable gift annuities, and charitable remainder trusts.

Commercial 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

A 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.

The 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.

A 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.

In 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.

Before 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.

Mary 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 maryshood@comcast.net. Learn more about the Foundation’s gifting program at www.realestategifting.org.

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