Why are Life Estate Gifts Great for Planned Giving?
A “Life Estate” gift enables a donor to give a piece of real estate to a person or organization but retain the use of it during their lifetime. The donor transfers the title, but sets future date for the new owner to take possession of the real estate. The donor gives the remainder interest while retaining ‘life estate’. If the property passes to a non-profit, the donor can receive a substantial current tax deduction for making this donation.
Life Estate Example
So what does this look like. Here’s an example. Bill’s main asset is his home. His long term involvement in XYZ charity inspires him to make a big gift. He decides to make a life estate gift to XYZ charity of his home. Once the paperwork has been signed sealed and delivered, Bill’s gift is complete. XYZ charity now owns a remainder interest in the property. They will take ownership once Bill and his wife pass away. Bill gets to take a sizeable tax deduction that is equal to the value of the home minus the estimated value that they will retain because they continue to live there until their deaths.
For as long as Bill lives, he is responsible for the property taxes, maintenance, and upkeep. If he decides to make any capital improvements to the property, he can be eligible for an increased tax deduction. If five years elapse from the time of the life estate gift, the property is protected from any Medicaid liens that might be assessed due if Bill gets sick and needs long-term medical care.
More than homes
Life estate gifts are possible for other kinds of real estate besides single family dwellings. You can donate a life estate in a piece of rental property, a vacation home, a working farm, etc. The primary requirements are that a person owns a piece of real property that they would like to go into the possession of your organization at their death.
Once the beneficiary takes full possession of the real estate, they can sell it, mortgage it, or do anything else that one might do with a piece of property.
If you’re considering making (or soliciting) life estate gifts, it is absolutely essential that you consult a competent attorney. Donors will want to consider several points before making a life estate gift. This list is not exhaustive, but gives a sampling of the types of questions you will want resolved.
- If the property still has a mortgage, there can be serious tax consequences for making a life estate gift. The recipient of the remainder interest might face an immediate tax liability for the amount that the real estate has appreciated since the original date of purchase.
- If less than five years elapse between the life estate gift and a serious personal illness, the existence of a life estate contract might disqualify the donor from receiving Medicaid benefits for long-term disability.
- Once a life estate contract has been completed, the property cannot be mortgaged without the consent of both the donor and the recipient organization.
For a more complete legal guide to ‘Life Estate’ gifts, please visit the Planned Giving Design Center.
Looking for more articles on planned giving? Try these:
- What is planned giving?
- Should I start an endowment?
- What is a bequest?
- What is a legacy society and how does it help with planned giving?
- What is a charitable gift annuity?
Check out The Fundraiser’s Playbook for a full list of fundraising articles.
Would you like to learn more about raising money for Church and Ministry? Check out Letters From The Almoner, now available on Amazon.com.
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