A retained life estate is an opportunity for an individual to donate their personal home or farm to charity, but then retain the right to live in it for the rest of their life or for a fixed period of time. When the individual dies or the term of the gift ends, the charity can keep the property for its own use, or they may sell the property and use the proceeds as they see fit. A clear and detailed written agreement is essential to spell out all the rights and responsibilities of both parties, including dealing with incapacity, vacating the property, and various other issues that may arise.
Even though the title of the property has changed hands to the charity, the life estate donor retains full use and control of the property. This includes full responsibility for taxes, utilities, maintenance, and other household operational expenses. Despite continuing to live in or use the property, the donor is entitled to a charitable tax deduction in the year the gift is made based on the appraised value of the property, adjusted for their life expectancy, applicable IRS discount rate, and various other factors.
Potential Benefits to Donor
- Giving a gift now while retaining the right to live on property.
- Tax deduction in year gift is given and potentially for another five years or until the deduction is completely utilized.
- Additional cash flow for the donor because of the tax deduction.
Potential Benefits to Nonprofit
- Enhanced trusted relationship with the donor that also provides the potential for greater annual giving with the increased cash flow to the donor.
- Property is released to the nonprofit upon the death of the donor for their use or to sell and use the profits for the nonprofit.
Let's use Joe as an example (this is a hypothetical example for illustrative purposes only). Joe is 80 years old and unfortunately, he's not in the greatest health. He only expects to live for another 5 to 10 years. He wants to be able to support his favorite charitable organization upon his death and he is looking for a way to increase his income and reduce his taxes with his gifting strategy.
Joe knows when he dies his children are not interested in inheriting his home because they have homes of their own and he has other assets set aside for them. Therefore, Joe could consider gifting his home to his favorite charity. Assuming the value of his home is $250,000, if we keep the calculation simple, today, at age 80, Joe would have an approximate charitable tax deduction of $205,000. He could use that tax deduction to reduce his income taxes in the year of the gift and possibly for up to another five years after until the full tax deduction amount is reached. This would increase Joe’s current cash flow because he would be paying less in income taxes for the next several years.
We assist donors by helping gather the appropriate documents and working with their CPA and providing the tax deduction calculations that will be needed by the donor’s CPA. For more information please contact Bill at (913) 322-9177.
Financial Professionals do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.
Bill Eckert, CAP® is a registered representative and investment advisor representative of Securian Financial Services, Inc. Securities and Investment Advisory Services offered through Securian Financial Services, Inc. member FINRA/SIPC. Renaissance Financial Corporation is independently owned and operated. Address: 7500 College Boulevard, Overland Park, KS 66210. (913) 322-9177. 5040537 11/2022