By: Judi Tichenor, Executive Director, Rice Office of Gift Planning
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What is a gift of real estate with a retained life estate?
Simply stated, a gift of real estate with a retained life estate allows a
donor to make an irrevocable gift of the deed to a piece of real estate
while entering into an agreement with the charity, reserving the right to
reside in or otherwise use the property for life, or a term of years, or
both. Usually the agreement is for life, and the charity receives the
actual property when the donors and/or any other residents, known as "life
tenants," have all passed away. At that point, the charity, which already
has the deed in title to the real estate, takes possession of the property
according to the conditions of a mutually arranged agreement ("the retained
life estate agreement") entered into at the time the deed is given. In
essence, you can deed your house to a charity (like Rice!), keep the keys
and receive an immediate charitable income tax deduction.
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Can I do this with any piece of real estate I own?
You can make a gift of either a personal residence (including your primary
home, a vacation home, or any other structure you use as a residence) or a
farm (vacant land or homestead) and reserve the right to continue to occupy
it.
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How might I benefit from making a gift of real estate with a retained
life estate?
There are several reasons a property owner might make a gift of real estate
and retain a life estate for themselves and/or others. First, this type of
gift offers an immediate charitable income tax deduction even though Rice
will not actually gain access or use the property until you are finished
with it. Second, for those with estate tax concerns, it is a valuable
wealth protection/estate planning tool that may shield your estate from
federal estate taxes. Third, the property you have irrevocably given to
charity will bypass probate. Fourth, this type of planning can reduce the
stress on your family and heirs of disposition of your real estate, leaving
them free to focus on your final wishes and to inherit other assets from
your estate with less worry.
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Who is responsible for paying the expenses, taxes and maintenance of
the property while it has life tenants in it?
Generally, the life tenants continue to pay all expenses related to the
holding and upkeep of the property, including, but not limited to: real
estate taxes, homeowners liability and casualty insurance, utilities,
maintenance and minor repairs, remodeling and major repairs. There may be
situations where a division of costs might be agreed upon between the life
tenants and the charity for an improvement to the property that impactfully
increases its value; however, under IRS rules for this type of gift,
charities cannot agree to anything that would be considered an enrichment
or income for the life estate tenants.
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Can I make a gift of any other type of property with a retained life
estate, like a valuable work of art?
Unfortunately, no, the gift with a retained life estate in which you would
receive the tax benefits only applies to gifts of real estate.
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How do I qualify for a charitable income tax deduction even though
I am still living in or using the property?
This real estate gift is a unique combination of an immediate gift to
charity, in that you irrevocably deed the real estate over to the charity
during your lifetime, and, with the retained life estate agreement, it is
also a deferred gift to charity because the charity does not take
possession until later. The current transfer of the deed of gift is what
permits you to take the charitable income tax deduction, even though you
have not surrendered possession of the actual property to the charity. A
formula with multiple factors is used to determine the charitable income
tax deduction on a real estate gift with a retained life estate, beginning
with the donor obtaining a qualified appraisal of the property.
To discover how this method of charitable giving can work for you, contact
Judi Tichenor at 713-348-4624 or [email protected].
