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Sunday, April 28, 2024
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Case Studies |
The Flexible Life Estate
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Case:
Melvin and Mae Brooks are proud and loyal supporters of the arts. In fact, over the past two decades, they have contributed almost $500,000 to the arts in their community. Not surprisingly, the Brookses intend to leave a portion of their estate to charity. Specifically, the Brookses plan on bequeathing their $250,000 home to the local art museum. During a discussion with the art museum's staff, Tom Borman, the gift planning officer, suggested that a life estate (i.e., gift of the remainder interest in a home) may work nicely given the Brookses' objectives. He said the irrevocable transfer of the remainder interest in their home would provide an immediate charitable income tax deduction. More importantly, the Brookses could live in the house for the rest of their lives, and, upon the second death, the home would pass to charity without having to go through probate.
Melvin liked the plan but was concerned about Mae. In particular, Melvin worried that after his death Mae might fall ill and not be able to care for herself. He feared that she might need some extra income for nursing care; however, he did not want Mae to have to leave their home. It was of great importance to Melvin and Mae that they live out their lives in their home and not a nursing facility. However, if Mae remained in good health, the extra income would not be needed, since they had other income-producing assets that would pay for her living expenses.
Question:
Is there a way for the Brookses to make the gift, yet still provide a stream of income to Mae on a contingent basis (i.e., in the event she needs nursing care)?
Solution:
Yes. Tom suggested combining a life estate with a flexible deferred gift annuity. In short, the Brookses would transfer their remainder interest in their home for a flexible deferred gift annuity. In this case, the remainder interest is $160,700. Therefore, the art museum would issue a gift annuity in exchange for the remainder interest in the Brookses' home. In this case, the art museum agreed to issue a $150,000 flexible deferred gift annuity. (Ed. It is common for charities to negotiate a lower annuity value for real property and other assets when the selling price is uncertain and where selling costs will be incurred by the charity.)
The flexible deferred gift annuity is an excellent vehicle, given Melvin's concern. If Mae requires nursing care in the future, she merely has to make an election and her annuity payments will begin. However, if Mae does not require care or additional income, she can continue to let the gift annuity defer, which increases the payout substantially for subsequent years.
With a $150,000 deferred gift annuity and a tentative starting date five years from now, Mae could receive payments of $21,750 a year, which is an impressive 14.5% annuity rate. If she chooses to wait two more years, her annuity rate would rise to 17.1%. Conversely, if a sudden illness requires payments three years from now, Mae would still be entitled to an annuity rate of 9.4%. In addition to this safety net, Melvin and Mae would receive a charitable income tax deduction of $105,426 for creating the gift annuity. Further, Melvin and Mae would be entitled to an outright gift charitable deduction of $10,700, which represents the excess of the property value over the gift annuity contract value ($160,700 - $150,000).
As a result of the overall plan, Melvin and Mae decide to complete the gift. They are thoroughly pleased with their flexible life estate plan that allows them to make a generous gift to their beloved charity, yet also provides them with money for a rainy day.
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