Many times people wonder how they can give to their fellow man without getting “eaten out of house and home” as the saying goes. The good news is there are numerous ways where, unlike most other charitable gifts, you do not have to write a big check or give up the benefit of using current assets or investments. These tools have been around for over 100 years in the United States tax code, giving Real Estate investors like you the satisfaction of knowing your charitable contribution will touch and transform many lives in the future, while allowing you to enjoy many personal and financial benefits today.
One of the best ways you can give is through a Life Estate Gift. A Life Estate Gift, included in the IRS Code Section 170(f)(2), allows you to generate a very large tax deduction by pledging your home or farm in the future. Nothing changes in your lifestyle or in the day-to-day experience of living in your home. This arrangement only requires three things: an appraisal, a deed and a written agreement.
To put it simply, imagine drawing a dotted, vertical line to divide your home in half. One half is the financial value of living in the home the rest of your life. This is called the “life estate”. The other half is the ultimate value that you are giving away to charity. That is called the “remainder interest”. The value of the life estate and the value of the remainder can be easily calculated online or using tax software. When interest rates are low, the deduction is high, so now is a very advantageous time to consider a life estate gift within your estate, financial and philanthropic planning.
For example, what would you do with an extra $140,266 in working capital? Suppose a married couple age 65 sets up a life estate for their $700,000 home, they would be entitled to a charitable income tax deduction in the amount of $350,665. (This amount will vary somewhat depending upon interest rates and on how much of the value is in the home versus the land.) At a 40% combined income tax rate, the tax savings would amount to freeing up $140,266 in working capital. In the case of an 80-year-old individual with the same home, the tax deduction would be $548,476. This would free up $219,390 in newfound working capital.
You might ask, “What if we want to downsize or need to move into an assisted living facility some day?” All of the contingencies can be agreed upon in the companion life estate agreement. For example, if you choose to move out of the home for any reason, you can rent it out. If you need the money to buy another home, you can jointly sell the home with the charity and divide the proceeds according to an updated calculation. Always consult with capable tax, legal and financial advisors prior to making a significant gift.
Here is a summary of the benefits in a life estate gift:
• Generate a large tax deduction today by setting up a gift in the future
• Flexibility in the choice of the real estate to be used: give a home, a second residence or vacation home, a farm, or even a houseboat
• The ability to make a larger gift than you might have thought possible
• Keep the use of the asset
• Frees up working capital
• Distribute the gift among several charities
• Take up to six years to absorb the tax deduction
• Low-cost and simple – just requires an appraisal, a deed and a short agreement
• Simplifies the estate plan and avoids probate; the property transfers immediately upon death
• Lifestyle flexibility: You can live in the home the rest of your life, rent it out or sell it, and you can even sell it on an installment note
• Can be revocable or irrevocable (The benefits of a revocable arrangement are that it still affords all the estate planning benefits, plus you can revoke the agreement if you change your mind. However, the current tax savings and other current financial benefits only come when the life estate is irrevocable.)
• The life estate is a financial asset that can be used as collateral
• The joy of giving now and the satisfaction of knowing that the gift you set up today will touch and transform many lives tomorrow
© 2015 by Gregory R. Bodine, Senior Gift and Estate Planner, The Salvation Army. Used by permission.