When a life estate is created, the donor retains the life use. Under the common law of most states, the life tenant is obligated to maintain the property. However, a written agreement that clarifies the roles and responsibilities of both the donor and the charity is desirable.
Maintenance, Insurance and Taxes
The maintenance, insurance and taxes ("MIT") agreement defines the responsibilities of the donor as life tenant. The donor will be expected to maintain the property in its current condition. Since he or she is residing in the property, the donor is also required to maintain insurance and pay the real estate taxes. While the donor is required to maintain insurance, many charities take the additional precaution of adding properties to their master insurance lists.
Leasing the Property
An owner of a life estate may move to a retirement facility or other residence and lease the residence. Since the charity is the remainder interest owner, it does have an interest in making certain that the property is appropriately maintained. Consequently, it is common in the MIT agreement for the charity to have a right of approval over parties who would lease the residence. In addition, the lease should clarify that, if the donor passes away, all lease income will thereafter be paid to the charity for the duration of any lease.
Capital Improvements
Most costs during the lifetime of the donor will be borne by the donor. However, if a capital improvement is contemplated, it is permissible for the donor and the charity to share costs for the improvement. In effect, there is a joint ownership arrangement, with the donor owning a portion of the property and the charity owning the balance. Therefore, it is appropriate to share costs for capital improvements. Alternatively, if the donor decides to bear the full cost of the capital improvement, the donor receives an additional charitable deduction for the remainder value of the addition.
Example 3.7.2A Maintenance, Insurance and Taxes Agreement
THIS AGREEMENT is entered into at ____________County, State of _______________, on ________________, by and between _____________________, a qualified exempt Section 501(c)(3) charity (the "Charity"), and _________________ and ___________________, a married couple, of ____________, _______________ (the "Donors"). WHEREAS, the Donors have this day executed a deed giving to the above charity a remainder interest in their personal residence in the City of ____________, and County of ____________, known as ________________________ _______________ (the "Property").
NOW THEREFORE, the parties hereto agree as follows:
1. The Donors, jointly and severally, shall have the sole responsibility for maintaining the property, insuring the property against loss and liability, and paying real estate taxes, and shall not, without the consent of the Charity, permit any lien or mortgage to be placed on the property other than liens or mortgages which may now exist, and shall not, without the consent of the Charity, permit the amount of any lien or mortgage now existing to increase.
2. The Donors shall, during their respective lifetimes, have the sole right to occupy and utilize the premises as their residence and to lease the premises to any other person for use as a personal residence. The Charity shall join in any lease of the premises to another in order to permit the lease term to continue beyond the death of the surviving Donor, provided that such term shall not continue for more than one year beyond the date of death of the surviving Donor and provided further that the Charity shall be entitled to the rent from the property from the date of death of the surviving Donor.
3. In the event of any damage to the property, the Donors, at their sole expense, shall cause such damage to be repaired unless the Donors and the Charity shall agree that it is impractical to do so, in which case, any insurance proceeds resulting from such damage shall be divided between the Charity and the Donors in accordance with the value of their respective interests as of the date such damage occurred. For purposes of determining the value of the Charity's interest in the event of such loss, the value shall be determined in the same manner as is used to value a remainder interest in a personal residence as is provided in U.S. Treasury Regulations Section 1.170.
4. The Donors, jointly and severally, agree to hold the Charity harmless against any and all liability arising from the property during their lifetimes. The Donors may at any time or times at their sole expense make improvements to the property, provided that such improvements shall not result in a reduction of the value of the property.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above written.
THE CHARITY DONORS
By: ___________________________ ____________________________
And by: ________________________ ____________________________
