Retained Life Estate: You Get What You Give

Among the most pressing questions when formulating a cohesive estate plan is what to do with an individual’s residence. For many, residential properties make up the largest or among the largest portion of one’s net worth. Believe it or not this can couple nicely with one of the most commonly used estate tax strategies as well, charitable giving.

At GFP, we feel strongly about the altruistic aspect of such donations, but the tax advantages can also be enticing if deployed properly. We’ve done a lot to support clients in creating Qualified Personal Residence Trusts as well as Donor Advised funds in the past. One should strongly consider both the philanthropic and tax advantages to incorporating these strategies in an estate plan. This week we will skim the surface of the Retained Life Estate conceptually and seek to explain where and why it can be a good fit. The core concept is that the donor gifts the property to a nonprofit organization of their choice, retains the right to live there for a term (such as the life of the donor and their spouse), and upon their death the property is given to this organization. In the meantime, the donor reaps the benefits of a charitable tax deduction. This is a complex strategy, but we will attempt to break it down for you in plain English.

Defining the Personal Residence

The Retained Life Estate is required to be a personal residence. The important distinction to make here is that the property need not be an individual’s full time home. As long as the property is a home, is not being lived in by anyone else, and is not producing revenue it can be defined as a personal residence. For example a lake house, vacation home, or condominium all qualify. You can even donate a farm if you choose. It is also important to point out the items and property within the home must be given separately, and won’t be factored into this calculation.

Tax Considerations

No tax deduction is allowed for donations of partial ownership in a property on federal income taxes except in the cases of a charitable remainder unit trust, pooled income fund, or a qualified charitable remainder annuity trust. These exceptions mean that you cannot claim this deduction based on the partial gift of a property, but you can claim a deduction based on the amount of your ownership in the asset, as long as the other owners contribute their ownership in the property as well.

Like all charitable donations, a retained life estate has a tax deduction limitation of up to 30 percent of the donor’s adjusted gross income. Additionally, any leftover portion of the remainder interest value can be carried over for up to 5 years.

Donors can receive a charitable deduction on federal taxes equal to the amount of the net present value of charitable remainder interest. If this calculation sounds complicated, that’s because it is. Factors include market values of the property, depreciable improvements, depleted resources, salvage value of these improvements at the end of their use and the Applicable Federal Midterm Rate among other things. This is why it is imperative that you call a professional like Granite Financial Partners to assist you in utilizing this strategy.

The final benefit of such a transaction is that the real estate is no longer included in your taxable estate upon death. If you don’t want to burden your family members with selling the property, this can be effective in avoiding that as well. In summary, the end the Retained Life Estate donation allows you to capture a sizeable income tax deduction while you are still alive, live in the property until you pass, then exclude the property’s value in your estate tax calculation, in exchange for forfeiting your family’s ownership of the property upon your death.

Flexible Timeline

As the donor of a Retained Life Estate, you oversee how you reap the tax advantages as well. You can design the gift to be measured by a lifetime (how long you will live, passing the real estate to charity in full upon your death), by a term of years, or a combination of the two. If you decide upon a term of years there are no maximums or minimums required for tax purposes. Meaning that this term could be one year or 30. Combining the two would mean the donor can transfer a portion of the property over a specified period, then retain ownership of the rest until death.

You Design the Agreement

When you donate a property, you are doing a good thing for an organization that matters to you. As the donor and original owner of the property you are granted the opportunity to set the terms of engagement up front. It is prudent to employ legal help to craft a professional gift agreement that establishes the details on responsibilities like remodeling, repairs, utilities, insurance, and the many other considerations with property ownership. Additionally, it is wise to establish a clear dispute resolution process in case unforeseen issues arise.

Don’t Go Alone

A retained life estate is a complex blend of financial and legal strategy that is best left to the professionals. If you think this or a similar tactic could work for you start by setting some time aside to meet with us at Granite Financial Partners. Based on our conversation we can help you decide whether this is really the best fit for you, or if another option may be more advantageous. Implementing this strategy is a big undertaking but the altruistic and financial value is substantial, reach out to us to hear more.