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Thursday, May 2, 2024
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Case Studies |
A Restful Retirement Retreat
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Case:
Several years ago Mother and Father built a unique home on 45 acres of beautiful rolling hills and woods. Father passed away three years ago and Mother now solely owns the 45-acre parcel and home.
She enjoys the peaceful country view out her front window. However, the university adjacent to the property is very interested in acquiring the property for eventual future growth. Not surprisingly, Mother is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that eventually some planning will have to be accomplished.
Question:
How can Mother enjoy her peaceful country view, increase her income today and allow the university to acquire the property when she passes away? And, there is one more request. Her son would like to eventually acquire the unique home and move it to a nearby city when she passes away.
Solution:
This situation requires a four-part solution. First, the property is divided into the front 20-acre parcel, the five acres in the center with the lovely country home and the rear 20-acre parcel. The rear 20-acre parcel is transferred into a charitable remainder unitrust paying 6% to Mother for her lifetime. The university immediately purchases the property from that trust for a note paying 7%. Each year, the university makes the payments to the trust and those payments flow through to Mother. The 20-acre parcel is valued at $1 million, so Mother will receive $60,000 of income a year (plus potential growth). When Mother passes away, the note is returned to the university.
The front 20-acre parcel is sold to the university for $1 million. In addition, the university agrees not to develop the property for seven years. Since the front parcel would be the first property to be developed, this effectively limits the development of the entire property for the seven years. The university is quite willing to do this, since it does not plan to use the property for 10 or more years.
Third, Mother transfers the remainder interest in her home plus the remaining five acres to the university in exchange for a gift annuity. The lovely country home plus acreage is valued at $800,000. The gift annuity for the remainder value pays approximately $44,197.92 per year.
Mother would like the university to take care of the maintenance and insurance on the home. Therefore, she and the university entered into a separate agreement that the university would provide maintenance services and include the property in its master insurance plan for $4,000 per year. This leaves Mother with approximately $36,000 per year.
Fortunately, with the use of her $250,000 exclusion, this gift annuity has the same tax benefit of a cash gift annuity and over $25,000 of the annuity is tax free.
If Mother ever decides to move into a retirement community, then she and the university can accelerate the agreement. The remaining value of her life income interest could be exchanged for another gift annuity or be handled through an outright gift or a bargain sale to the university.
Fourth, after the orginal gift annuity, i.e., not the one possible if she moves to a retirement community for remainder interest has been created, the son enters into an option agreement with the university. It is a contingent agreement that permits the son to purchase from the university the home and move it to the nearby city if the university later acquires title to the property.
Mother now has liquidity from the sale, income from the unitrust, largely tax-free income from the gift annuity and a peaceful view out her front window. The university is making payments on the gift annuity and the unitrust note, but will receive title to the entire 45-acre property in the future. Finally, when Mother passes away, the son will be able to acquire the residence at a fair but reasonable cost and move the family residence to a nearby suburban area.
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