LIFE ESTATE RESERVED GIFTS - A flexible alternative for real estate gifts

One of the most attractive but easily overlooked deferred gifts is the life estate reserved. A life estate reserved gift is easily accomplished and consists of the donor donating a personal residence (although other types of properties may also be used) to a charitable organization with the stipulation that the donor retains the right to live in the property until his or her death. The life estate reserved gift is very flexible.

Normally created for one or two lives (e.g., husband and wife), the transfer may be for a life, lives or a term of years. The property is transferred to the charity via a deed subject to the life estate of the donor. The transfer must be unrestricted, but the donor can receive an income tax charitable deduction equal to the present value of the remainder interest of the property. The deduction, however, must be reduced by the depreciation and salvage value of the property. This type of gift falls into the "appreciated asset" category and is therefore subject to the deduction limitation of 30% of adjusted gross income. However, if the donor cannot use the entire charitable deduction in the year of the gift, the remaining deduction may be carried forward up to five additional years.

In addition to the income tax deduction, life estate reserved gifts also qualify for gift tax and estate tax deductions.

What happens if the property has debt like a mortgage that has not been paid off?
It is possible in many cases to transfer part of a remainder interest (the paid part of the mortgage), combining the remainder interest gift with a bargain sale in which the charity pays the donor the value of the remaining debt.

Who is responsible for the continuing maintenance, taxes, and insurance costs associated with the property?
Another important question to ask. In most cases, the donor will still be responsible for these ongoing expenses, but it is always important for the charity to stay in touch with the donor to make sure these important responsibilities are accomplished. A simple agreement signed by the donor and notarized will usually suffice, but the organization should set up safeguards to ensure the charity's remainder interest is protected.

What happens if the donor decides he/she no longer wants to live in the property and wants to terminate the agreement?
Sometimes a donor will decide he/she wants to move from the residence for valid reasons. There are a number of ways the life estate agreement can be terminated:

• The charity and the donor may agree to jointly sale the property. Once the property is sold, the charity receives the equivalent of the remainder value at the time of sale; the donor receives the equivalent of the remaining life estate interest in the property.
• The donor may gift the remaining life estate interest to the charity, which usually will result in an additional charitable deduction for the donor.
• The donor may contribute the value of his/her life estate interest to a charitable remainder unitrust or a charitable gift annuity, again probably receiving another charitable deduction and receiving an income for a term of years or life.

The life estate reserved gift is a flexible alternative for donors who are considering giving their residential real estate to your charity. Remember to mention this alternative to you donors who talk to you about bequeathing their homes to your organization. This option allows you to "lock in" the gift now, but has the added benefit of allowing the donor to easily move this asset to you now rather than having the executor deal with the transfer of property during the estate settlement process. The donor will continue to have the ability to convert the life estate should circumstances change.