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Wednesday, May 8, 2024
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Case Studies |
A Gift of a Home to Family and Charity
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Case:
Millie Fleming, age 85, has a modest estate of $450,000. Her daughter Katie is age 60 and recently lost her spouse to an illness that resulted in a difficult financial situation for Katie. She had never worked outside the home and is now faced with living on Social Security and a small amount of investment income. Millie and Katie together decided that the best course of action was for Katie to sell her home and move in with her mother. In this way, Katie has the proceeds of $85,000 from the sale of the house to provide her with some additional income. Millie then could provide Katie with a place to stay rent-free. With the housing expense paid and with the additional income, Katie would be able to live quite comfortably.
Millie's concern is for her daughter once Millie passes away. Even though Millie is still in excellent health, she knows that Katie will need financial assistance for the rest of her life. On the advice of her attorney, Millie has placed all of her assets into a revocable living trust designed to provide for Katie the rest of her life. Since Katie is Millie's only living heir, the trust has been drafted to provide for distributions to Millie's favorite charities once Katie is gone. However, because of Katie's financial needs, there is a chance that all of the trust assets will be used for Katie's care during her lifetime. In other words, the trust's assets could be completely dissipated in caring for Katie.
Millie has been generous throughout her lifetime, especially in volunteer work at Children's Memorial Hospital and her local food bank. She has given some small gifts to both of these charities over the past several years, but she is concerned about her own finances and wanted to make sure that she never had to become dependent on Social Security for her main source of income.
Therefore, the most that she has given to charity annually over the years has been $5,000. She would like to make a substantial gift of at least $100,000 to these charities when she's gone, but realizes that her first obligation is to take care of Katie.
Question:
What is the best way for Millie to make sure that Katie is provided for when Millie is gone and also make sure she can make a substantial gift to her favorite charities?
Solution:
Millie has had a number of conversations with her neighbor, Jeffrey Willis, regarding her wishes to make a substantial gift to charity upon Katie's passing. Jeffrey is an attorney who specializes in charitable estate planning and has done extensive pro bono work over the years for charity. Jeffrey stated that what she may consider doing is to deed her home to charity now and retain the right to live in the home for the rest of her life. Upon her death, Katie would have the right to live in the home for the balance of her life as well. Then, when Katie passes away, the home would be transferred to her two favorite charities. This life estate reserved agreement would result in the charities' receiving a substantial gift regardless of whether or not the assets in the living trust would be dissipated for Katie's care. Millie hopes there would still be ample assets remaining in the trust when Katie is gone, resulting in an even larger gift to charity down the road. However, even if most or all of the trust assets are used, Millie is basically guaranteed that a large gift to charity will eventually be made.
Millie is pleased with Jeffrey's counsel and decides to create the life estate with her home. With his assistance, she deeds 50% of the home to the hospital and 50% to the food bank, both 501(c)(3) charities, retaining a life estate for herself and for Katie. Along with having the peace of mind that Katie will have a place to live Millie has an additional benefit that results from the life estate gift - a current charitable income tax deduction of $30,000 (based upon an Applicable Federal Rate of 5.4%). When she files her income tax return next April 15th, Millie will be "rewarded" with tax savings that she was not expecting. All in all, she is very happy with Jeffrey's counsel and the results of creating a life estate.
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