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Saturday, May 4, 2024
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Case Studies |
A Life Estate Split Transfer to Family and Charity
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Case:
Roberta Wilcox is 80 years old and has lived in her personal residence over fifty years. She has two children, six grandchildren and ten great grandchildren. Her husband passed away fifteen years ago after a long and protracted illness. Roberta has a very modest estate of $350,000 and her primary asset is her residence with a fair market value of $100,000. Along with some personal property, the balance of her estate assets consists of stocks and bonds. Just this past week, taking the advice of her stockbroker, she sold some of her America On Line stock and incurred a very substantial gain. She is now very concerned that she may have to pay a sizable capital gains tax.
Roberta has been very active at a local Boys and Girls Home and is considering a gift of $50,000 to the home upon her death. Since her children are doing very well, Roberta would like to leave the balance of her estate to her six grandchildren. She recently heard a presentation sponsored by the National Committee on Planned Giving entitled Leave a Legacy and was concerned that she had not previously provided for charity in her Will. Even though she had been active at the Boys and Girls Home for years, no one had ever approached her about a possible bequest to the Home at her death. After viewing the presentation, she thought, "What a wonderful idea! I have given to my favorite charity my entire life and now I can 'leave a legacy' when I pass on."
Question:
Roberta decided to meet with the Development Director of the Home, Joel Johnson, and explained to him her intention to make the $50,000 gift. In the meeting, Roberta emphasized that she would like to leave $50,000 to the Home upon her death and then $50,000 to each of her six grandchildren. Joel, knowing that her home was located right next door to the Home and knowing that they desperately needed additional space, discussed with her the possibility of leaving her home to the charity. Roberta replied by stating that she desired only to leave $50,000 not a $100,000 home. This would not fulfill her objective of leaving $50,000 to each of her grandchildren. Joel stated that he would need to 'do some research' as to the best way to handle a gift involving her home. Actually, he was a novice at planned giving concepts and decided to talk with a friend who is the Director of Major Gifts at the local hospital.
Solution:
In meeting with his friend, Joel explained the dilemma he faced regarding Roberta's gift. Joel stated that his charity would love to have her home, but she was only willing to make a bequest of $50,000. His friend thought about this for a few minutes and then asked Joel, "Do you have any funds earmarked for purchasing additional space for the Home?" Joel responded, "Oh, yes. We recently raised about $55,000 which is now set aside for this purpose." His friend was pleased to hear this because he had an idea that might work very well for Roberta and for the charity.
The Director of Major Gifts outlined the following gift scenario: Roberta would transfer an undivided 50% remainder interest in her home to charity today. In other words, she would deed 50% of the remainder interest and retain the other 50% which would be transferred to the grandchildren upon her death. The result - Roberta would retain a life interest in the home and also retain 50% of the remainder interest. As a result of the 50% remainder interest gift to charity, Roberta would be entitled to a current charitable income tax deduction of approximately $44,000. This tax deduction could then be used to help offset the capital gain incurred as a result of selling her AOL stock.
The Director went on to explain to Joel that upon Roberta's passing, the charity would then own 50% of her home. The other 50% could then be purchased from her grandchildren with the funds earmarked for this purpose. Upon hearing of this gift scenario, Joel was thrilled and also very impressed with his friend's creativity and knowledge of planned gifts. With most of his time dedicated to raising current gifts, Joel now realized that even as a "one man shop" he needed to have some expertise in planned giving. Therefore, Joel decided to take the first step and join the local Planned Giving Council.
Roberta was very pleased to know that she could give a portion of her home to charity now, receive a current income tax deduction and continue to live in the home for the rest of her life. Also, she was able to follow through with her objectives to 'leave a legacy' to her favorite charity and provide for her grandchildren.
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