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Friday, May 3, 2024
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Case Studies |
A Gift of an Undivided Partial Interest
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Case:
Louise Logan, age 62, has been active in her church ever since she can remember. She now serves on the Board. Each summer, the Board members attend a weeklong retreat in the mountains to rejuvenate themselves and discuss the church's short-term and long-term goals. Louise has been kind enough to allow the Board to use her vacation home for the retreat instead of renting hotel facilities for a week. The home is located in the mountains about a 2½-hour drive from the church. It is a beautiful home, has five bedrooms and plenty of space for at least 20 people and is built on a lake surrounded by pine trees. The home was built by her husband and they anticipated that they would retire there. However, her husband died suddenly three years ago of a heart attack and now the home remains vacant a good portion of the year. Her children and grandchildren use the home for vacations periodically and the church staff sometimes uses the home for retreats as well.
Because there is considerable interest in the use of the vacation home by the church, Louise has considered a bequest of her vocation home to the church via her will when she passes away. Until then, she would like to retain control of the property and enable her children and grandchildren to use the property as they desire throughout the year.
Question:
Since Louise is considering ultimately transferring the home to the church, she asks the church administrator whether or not there is a way to obtain a current charitable income tax deduction for this "future value" transfer to charity. Louise is very generous and has given to many causes in the community over the years. She has an accounting background and has always prepared her own tax return. Therefore, she is well acquainted with the income tax benefits she receives as a result of her generosity and would be pleased if she could save taxes with a current charitable deduction of this property. However, as she stated, she would like to retain control of the home during her lifetime.
Solution:
The church administrator explains to Louise that one of the ways to receive a current charitable deduction is to give the church the right, as a tenant in common, to possession and control over the property for a 25% portion each year. Thus, Louise and her family will be able to use the home 75% of the year and the charity is able to use the home the other 25%. Louise accomplishes the transfer of this right by executing a deed transferring an undivided 25% interest in the property to the church. Therefore, assuming the vacation home is currently valued at $300,000, (based upon an appraisal), she would be able to take a charitable deduction of $75,000.
Generally, a charitable income tax deduction is not allowed for a contribution (not in trust) of an interest in property that consists of less than the donor's entire interest in the property. However, there is an exception to the partial-interest rule. The exception specifies that a deduction is allowed for the value of an undivided portion of a donor's entire interest in the property. An undivided portion must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and must extend over the term of the donor's interest in the property.
Because Louise gives the charity an undivided 25% interest, the charity has the right to the possession and control of the vacation home for three months each year. Therefore, the Board, the staff and any other church group can use the home during the year during this three month period. Louise, on the other hand, retains primary control of the property for the other nine months while making a charitable contribution and obtaining a valuable current tax deduction.
Editor's Note: The rules are quite specific with respect to what constitutes a completed gift of an undivided partial interest. Had Louise simply given the right to use the property for a portion of the year, no deduction would be allowed.
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