Case Studies and Articles

Life Estates (Estate Planning Tools That Pay Off Now) – Vaughn Henry & Associates

Life Estates (Estate Planning Tools That Pay Off Now) – Vaughn Henry & Associates

Estate Planning Tools That Pay Off Now

Vaughn W. Henry

Did you know, you don’t have to be filthy rich (or even have a taxable estate) to make use of some advanced estate planning maneuvers? One estate-planning tool an older client may use is a “life estate” arrangement with a local charity. This allows the donor to transfer a partial interest in a personal residence, vacation home or farm to a charitable organization and still retain the right to live there for either a stated number of years or through a specified lifetime. The advantage of such a contractual agreement is that the donor does not give up cash, income or lifestyle but still receives a charitable income tax deduction. This has real appeal to a donor whose estate isn’t large enough to be taxed at the federal level, but who still pays income taxes and could make use of the deductions. For those with taxable estates, a bequest that creates a charitable deduction might be helpful, but since most estates aren’t taxed, an income tax deduction from a deferred gift at fair market value is almost always useful.

Keep something while you’re giving it away.

So who might make use of such a life estate?

  • donors who want to benefit a charitable cause but who are unable to make current cash contributions
  • donors without heirs or those who don’t plan to pass a family home or farm to heirs
  • donors who have a close relationship to a charity, especially if the nonprofit has plans to expand physical plant facilities or programs and the real estate fits into their expansion plans
  • donors who would like for the nonprofit organization to have the property without restrictions or legal battles with uncooperative heirs in the future

What are the down sides to such gifts?

  • It is an irrevocable gift to charity and if the donor’s financial or health situation changes, that asset is no longer available to convert to cash.
  • The property becomes hard to sell or lease because the charity owns a remainder interest.
  • The donor usually is responsible for paying maintenance, taxes and insurance.
  • The donor may become disabled and be compelled to move into assisted care housing. Without any prior planning, what happens to the property?
  • The charity has to agree to take the property, no guarantees today in light of zoning, environmental restrictions and management concerns.

A good case study of the technique involves Elizabeth Hopper (72) who owns a retirement home in Florida. The house sits next to a local church she attends when visiting, and she has become active in the congregation. Since her husband passed away three years ago, she makes less use of the residence since it takes too much effort to close up and reopen the house. It was a popular place for her family to gather during the winter holidays, but the $120,000 house is not used enough to fully justify the expense. Possessing a lot of sentimental value, she’s unwilling to give it up completely now. The church would like to acquire the house as a residence for their staff, but is unable to purchase the real estate outright. Since the resort community continues to grow, it looks like the house will probably become more valuable, but her estate is modest and an outright bequest to the church will not solve planning problems. On the other hand, the church endowment committee has offered her a life estate in her residence if she passes the house to their organization at her death. In the meantime, she’s entitled to an income tax deduction of $66,676. The tax deductions would be available for her use over six years and she feels this will free up other income and still allow her the right to continue using the house as she wishes during her lifetime. After Mrs. Hopper passes away, the church acquires the property and may use it as needed without the outlay of additional funds. For some donors, this is as close as it gets to having your cake and eating it too.

For additional information, the web-site case studies, software and articles on estate and gift planning tools.

The income tax deduction may need to be offset by depreciation or depletion if the transferred asset’s value would be impacted by a limited useful life. IRC §170(f)(4) and Treas. Reg. §1.170A-12.