|
Friday, May 3, 2024
 |
Case Studies |
Death and Taxes - The Madison Era of Giving, Part 4 of 7
|
Case:
George Madison, Jr., 78, owns several homes scattered across the world. During his younger years, he thoroughly enjoyed traveling and spending time at each home. However, his health has severely restricted his mobility. As a result, most of his vacation homes sit dormant and unused throughout the year. Furthermore, the cost to maintain all of the homes is quite staggering even to someone in George's financial position. Consequently, George - now an experienced "planned giver" - assumes there must be a way he can use his housing excess to benefit both charity and himself. After speaking with his attorney, Matthew Cohen, George decided to gift a remainder interest in his $4 million Hampton summer home. Mr. Cohen explained that this gift would produce a charitable income tax deduction of more than $2 million. While George would still be responsible for the maintenance, insurance and taxes on the home, the tax savings would greatly offset those costs. George likes the plan even more because it does not divest him of his right to use the home. In fact, George retains the right to use the Hampton home for the rest of his life. Not until his death would the home pass to the named charity. The only reservation George has is about the excessive income tax deduction. It is not that he does not like the size of the deduction, but given his current yearly income he is unable to use the $2 million deduction even if he carries it forward five years.
Question:
George asks if he could gift a remainder interest in just 50% of his Hampton summer home.
Solution:
Mr. Cohen informed George that such a gift is permissible. Under Reg. 1.170A-7(b)(3), a personal residence includes a vacation home even though it is not used as the donor's personal residence. George's Hampton summer home thus meets the personal residence requirement. With respect to gifting a portion of the remainder interest, Mr. Cohen explained that the IRS has approved such gift arrangements on several occasions. (See for example Rev. Rul. 87-37 and PLR 8202137). Happy to have no IRS impediment to his gift, George completes the gift by month's end.
As a result, George received a $1 million deduction, which he can use entirely within the next five years. Moreover, at his death, he has the flexibility to leave the other half of the remainder interest to his children or to charity. Not surprisingly, George is very pleased with his $1 million tax deduction and his future gift to a local children's shelter. In fact, it still amazes George - as he basks in the warm summer sun next to his pool - that he is able to receive such a wonderful tax benefit from the government now while retaining all the amenities that come from owning a summer home in the Hamptons.
|
|
|
|
