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Saturday, May 4, 2024
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Case Studies |
E-I-E-I-O Life Estate
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Case:
Marilyn Frazier, a widow age 77, owns a 40-acre parcel of property adjacent to the local university which she attended over fifty years ago. She was unable to graduate back then and decided a few years ago to fulfill her lifelong dream of obtaining a college degree. The university was very receptive to her desire to graduate and went out of their way to plan her curriculum allowing her to complete her degree in two years. Her story was well publicized in the local papers and she was so pleased with the university that she has decided she would like to make a substantial gift to the university when she is gone.
The 40-acre parcel is currently being leased by a cotton farmer for a per acre price of $650 per year. This is a nice supplement to Marilyn's income each year and she would like to keep this income stream intact for the rest of her life. Her husband left her a nice IRA account which is distributing about $50,000 annually to her. She decides to take the minimum distribution from the IRA and would eventually like to leave the balance of the account to a nearby children's home where she has volunteered for years. She and her husband had no children, but she does have a nephew who has a special needs child and she would like to provide for the child in her estate plan. In past conversations, Marilyn has had discussions with her nephew about leaving approximately $500,000 of her estate to him to care for this child. Her nephew is quite fond of this property and hinted that the land would be an 'ideal inheritance' for this purpose. However, Marilyn has plans to bequest other assets, primarily securities, to fulfill this objective.
The farm property is currently valued at $500,000 and her basis in the property is about $50,000. She has considered selling the property a number of times, but felt she couldn't part with it because it had been in her husband's family for generations. In fact, one thing her husband told her before he died was "not to sell the property and keep it for a rainy day." However, the university has expressed an interest in the property many times as they would like to use the land for future expansion. The plans that involve this particular piece of property are probably five years or so into the future, but the university would like to 'tie up' the land in case something were to happen to Marilyn.
Question:
Marilyn has no qualms about giving this property to the university as a bequest when she passes away. In fact, she recently amended her will through a codicil to do just that. However, she was wondering if there was a way to give this land to the university now, perhaps receive a tax deduction and then continue to receive the $26,000 in annual lease income.
Solution:
Marilyn posed these questions to the Director of Major Gifts, Thomas Adams, at the university. Thomas stated that there was a simple solution to her situation called a 'life estate reserved.' Marilyn would deed the property to the university and retain a life interest in the property. As a result of retaining the life interest, she continues to enjoy full use of the 40-acre parcel during her lifetime and, therefore, she will continue to receive the $26,000 per year in lease income from the property. In addition, Marilyn will also receive a charitable income tax deduction of over $300,000. This deduction is subject to 30% adjusted gross income limitations with five year carryover provisions. Based on her current income, she will not be able to use the entire deduction over the six-year period, but she is pleased to know that she will have this deduction to help offset her income for many years. Lastly, Thomas stated that when she passes away, there will also be savings in probate costs.
Marilyn is very pleased with this idea for a number of reasons. She is able to make a substantial gift to her favorite charity without any cash outlay. It is what she called a "painless" gift. In other words, this is an easy way to pass the farm property to charity now since she was planning to bequest the property to the university at her death anyway. Marilyn is able to know that she is providing the university with land for future expansion - a gift that has sentimental value to her since she would like to see the university continue on for many years into the future. Lastly, she desires the university to have the land without restrictions or legal battles with uncooperative heirs. In the back of her mind, she perceived that her nephew had his eye on this property and Marilyn wanted to guard against this potential problem.
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