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Saturday, May 4, 2024
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Case Studies |
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 4 - The Great Home Give Away
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Case:
Harold Henry, 77, is a very generous American. He is the stereotypical major donor that charities love to find. Coming from a wealthy and philanthropic background, Harold has given approximately $15 million to national and local charities over his lifetime. In addition, he currently sits on the boards of several charities and loves his role as a volunteer and donor.
With a $20 million estate, Harold's estate plan is very comprehensive and reviewed annually. Not surprisingly, Harold is always contemplating new gifts and tax-wise planning. In fact, during the past two years, Harold has been tinkering with the idea of giving the remainder interest in his $2 million Seattle home to one of his favorite charities. Harold loved the idea and the income and estate tax benefits associated with the gift. However, due to his busy schedule, he just has not found the time to complete the gift.
Fortunately, Harold's attorney, Stan Sutton, was aware of his gift intentions. Accordingly, Stan noticed the dropping applicable federal rates (AFR) this year and advised Harold that now may be the time to make the gift.
Question:
What advantage is there for making a gift of a remainder interest in a home during dropping interest rates? What window of opportunity exists for completing this gift? How much can Harold save by completing this gift now?
Solution:
A gift of a remainder interest in a home produces a charitable income tax deduction equal to the actuarial value of the remainder interest. When computing the remainder interest value, an applicable federal rate must be used pursuant to Section 7520. With life estate arrangements, the lowest AFR produces the largest charitable income tax deduction.
During the past two years, the AFR rates have remained mostly in the 5% to 6% range. However, the AFR for May 2008 is a mere 3.2%. Therefore, it is a great time to complete a gift of a remainder interest in a home. For example, Harold's charitable deduction is approximately $1,250,000 when using the low AFR. However, if Harold had gifted his home when the AFR was 6%, his deduction could be approximately $150,000 less! Thus, assuming a 40% federal and state combined income tax rate, Harold could save an additional $60,000 just for completing the gift now while interest rates are low.
Because a donor may elect the current month or the prior two months, Harold could even wait until July to complete the gift. He simply would elect to use the May AFR at that time. However, if the rates continue to drop, he of course could select the rate which would produce the greatest deduction.
Once Harold passed away, the home would pass to the charity without having to go through the probate process. Also, the value of the home would not be subject to any estate taxes. As a result of all these benefits, Harold informs Stan to began the gift process.
In the end, Harold lives up to his reputation as a generous major donor and a tax-wise planner. By taking advantage of the current state of the economy, Harold will make a wonderful gift to charity at just the right time.
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