Thursday May 2, 2024
|
|
|
|
|
3.4.5 Gift Annuity for Home
|
|
|
Life Estate and Gift Annuity
The gift annuity for home is a combination of two qualified charitable agreements. The donor may desire to live in his or her home for life and to receive annuity payouts. If the donor were to create a life estate, the remainder could be transferred to charity and the donor would receive a charitable deduction.
However, with the gift annuity for home, the donor exchanges the remainder value of the home for a gift annuity. In effect, it is a combination of a life estate and a gift annuity. The donor retains the right to live in the home for life and the remainder value is transferred to the charity for the gift annuity. The donor receives a partial charitable deduction for the gift portion of the remainder value and the annuity contract value is the balance of the remainder amount.
Remainder Interest in a Personal Residence
The first step with a gift annuity for home is to value the remainder interest. This value is the same as with a gift of the remainder interest without a gift annuity. A donor may receive a charitable deduction for the transfer of a remainder interest in a personal residence, farm or ranch. Sec. 170(f)(3)(B)(i). The donor deeds the personal residence or farm to a qualified exempt charity and reserves a life estate. The life estate may be a personal right for the donor to use the property, or more commonly a right to use of the property during the donor's lifetime. The latter option would allow the donor to lease the property and receive rental payments during his or her lifetime.
A remainder interest may be transferred in any property used by the donor as a personal residence. Personal residence is defined as "any property used by the taxpayer as his personal residence even though it is not used as his principal residence." This may include the taxpayer's vacation or even stock owned by a taxpayer as a tenant-stockholder in a cooperative housing corporation (as those terms are defined in Secs. 216(b)(1) and (2) and if the dwelling which the taxpayer is entitled to occupy as such stockholder is used by him as his personal residence). Reg. 1.170A-7(b)(3).
Undivided Interests in Life Estates to Solve a Debt Problem
It is also possible to transfer an undivided percentage of the remainder interest. For example, a remainder interest in part of a farm may be transferred to charity. Rev. Rul. 78-303. Alternatively, the remainder interest may be divided with a portion of the remainder transferred to family with the balance transferred to charity. Rev. Rul. 87-37. However, if the charity receives a minority interest in the remainder, it is possible that the minority interest should be subject to a valuation discount.
The ability to transfer part of a remainder interest is beneficial if there is debt on the property. It may be possible to combine a remainder interest gift with a bargain sale. Sec. 1011(a). For example, the charity may purchase a portion of the remainder interest sufficient to pay the debt, and the donor may then give the charity the balance of the remainder interest.
"Maintenance, Insurance and Taxes" Agreement
Since the charity is acquiring real estate, it is essential to create a "Maintenance, Insurance and Taxes" agreement. See GiftLaw Pro Chapter 3.7.2. As life tenant, the donor is obligated to perform normal maintenance, maintain insurance and pay the property taxes on the home. One fortunate tax benefit for the donor is that it is permissible for the donor to use the home-sale exclusion of $250,000 single person or $500,000 married couple jointly filing. Sec. 121(d)(8)(a). This exclusion has the effect of raising the basis on the annuity contract value. For most donors, the entire exclusion ratio amount will be tax-free.
The donor is able to live in his or her home for life, receives a substantial charitable income tax deduction and benefits from the annuity payouts, with a majority of the payment often tax-free. This is clearly a very attractive plan for many senior donors.
Example 3.4.5A
John and Mary Jones like their home and plan to live there for the rest of their lives. However, they also desire a tax deduction and additional income.
John and Mary transfer the remainder interest in their $800,000 home to a charity in exchange for a gift annuity. Based on Treasury tables, the remainder value is $568,200. The two-life annuity of 5.9% results in a payment of $33,525 annually to John and Mary. In addition, the charitable deduction of $246,386 may save $59,133 in their 24% tax bracket.
They elect under Sec. 121(d)(8)(A) to allocate their $500,000 home-sale exclusion to the sale of the remainder interest (which is used to fund the gift annuity). Under this provision, the home sale capital gain exclusion may be used for a remainder interest. With the increased basis in the contract portion of the gift annuity, there is no capital gain recognition. Since they also have substantial income from their IRAs, they are delighted that the deduction plus the generous tax-free income will produce substantially increased after-tax income for their lifetimes. Not only do they enjoy tax benefits and much greater after-tax income, they have the joy of knowing that their home will eventually fund the mission of their favorite charity.
Cost/Benefit Analysis
The charity should consider this agreement as a purchase of real estate. This plan is most attractive for the charity if the donors are age 80 or older. If the property is in a residential area that is likely to appreciate, the acquisition can be attractive. Alternatively, if the charity is attempting to expand its campus and can acquire surrounding homes through the gift annuity for remainder interest method, the acquisition cost typically will be one-third of the price paid compared with the cost if the charity waits and purchases the home from the estate.
The charity should calculate the internal rate of return through a cost/benefit analysis. The cost to the charity is the payment of the annuity plus the interest cost. Presumably, the annuity amount will reduce the charity's endowment. In addition, during the lifetime of the donor, the charity is also foregoing interest on the amount withdrawn from its endowment.
The benefit to the charity is the value of the house, plus appreciation during the life of the donor, less cost of sale after the donor passes away. For donors age 80 and above, the annualized internal rate of return can equal 15% to 40%. For very senior donors who are holding desirable property, this plan can be quite beneficial for both the donor and the charity.
|
Case Studies on Gift Annuity for Home
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 5 - Life Estate and Deferred Gift Annuity Combination:
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.
A Restful Retirement Retreat:
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.
The Life Estate and ILIT Plan:
Gerard and Ruth Chapman own a home valued at $1,000,000. They purchased the home back in the 1970s for $350,000 and, due to the burgeoning real estate market in their area, the home appreciated nicely over the next 20 years. Gerard and Ruth have an estate valued at $15 million, including their home, and therefore, they find themselves in the top estate tax bracket. They have always thought that they would transfer the residence to their children upon their death, but realize that the estate tax "bite" would probably cause the children to sell the residence just to pay the estate taxes. Also, the children now are all grown and have moved out of the area and therefore probably would not want to keep the home anyway. However, the children would be more than happy to receive value from the home upon the passing of their parents, albeit net of estate taxes.
|
|
|
|
|
|
|
|
|
© Copyright 1999-2024 Crescendo Interactive, Inc.
|
|
