Planned Giving Menu
- Ways to Give
- About Bequests
- Advisor Tools
- Meet Our Donors
- Contact Staff
Jewish National Fund's award-winning Planned Giving Department helps you meet your personal, financial and estate planning goals by making a lifetime or testamentary charitable gift. Learn what types of assets make the best gifts, and how to make a gift that provides tax benefits and even life income.
Kyle is an 80-year old donor who has a soft spot for his favorite charity. He would like to make a substantial gift to benefit the charity using his home. He asks his professional advisor if there are any creative solutions that would allow him to benefit his favorite charity and take a large deduction without having to move out of his home. His advisor explains there is a way he can remain in his home and make a remainder gift of his home, all while receiving favorable tax treatment. The advisor recommends a one-life retained life estate which satisfies all three of Kyle's goals. Kyle informs the advisor his home has a fair market value of approximately $750,000. If he proceeds with the gift, Kyle will receive a charitable income tax deduction of $653,994. At his 22% tax bracket, he may save $143,879 in income taxes. The deduction may be taken up to 30% of Kyle's adjusted gross income in the year of the gift, with the ability to carry-forward the deduction up to five additional years. Upon his passing, the charity receives his home and there is a full estate tax deduction for the transfer. Kyle is required to obtain a qualified appraisal to determine the overall value of the property and allocation between the land and building value. He can obtain the qualified appraisal up to 60 days before the donation or up until the due date, including extensions, of his tax return. He was pleased with the potential outcome and moved forward with contacting his favorite charity to start the gift.The donor of a remainder interest in a home is entitled to take an income tax deduction for the present value of the remainder interest. The deduction is calculated using the Applicable Federal Rate (AFR) under the Sec. 7520 Valuation Tables and the factors from IRS Pub. 1457. The deduction is reduced for depreciation using the straight-line depreciation method.
If instead of moving forward with a one-life retained life estate, Kyle was curious if he could include his only son Dylan in a two- life retained life estate agreement for the use of the home after he passes away. Dylan is currently 55 years old and has a strong familial bond with his father. Kyle knows how much Dylan appreciates the family home and memories made there. Kyle asks his professional advisor if it is possible for the retained life estate to also include his son. The advisor informs Kyle that his goals will still be met, but there will be an adjustment to some of the tax savings. By adding Dylan in the two- life retained life estate, Kyle's charitable deduction is reduced from $653,994 to $470,686, a reduction of over $180,000. At his 22% tax bracket, his income tax savings are reduced from $143,879 to $103,551, a tax savings reduction of about $40,000. The advisor also states that a testamentary power of revocation should be included in Kyle's deed to eliminate immediate gift tax consequences for Dylan. With the estate tax lifetime exemption at $11.58 million in 2020 and $11.7 million in 2021, Kyle expects to hold a modest estate at his passing. Even if the estate tax lifetime exemption falls from its high values, Kyle's advisor believes the gift of the life estate to Dylan is unlikely to have any estate tax consequences when Kyle passes away. Kyle understands with his two-life structure how beneficial it would be to allow his son to use the home after he passes away. Dylan will not receive a charitable deduction because he is a non-donor beneficiary. In the end, his three goals of remaining in his home, gifting his home and receiving favorable tax treatment are still met. Kyle is pleased with adding his son in the two-life retained life estate agreement and contacts his favorite charity.The treatment of estate tax depends on whether the life estate reserved is for one or two lives and the second beneficiary's relationship to the donor. In a retained life estate for one life, when that individual passes away, there is a full charitable estate tax deduction. If the second beneficiary is a surviving spouse, the marital deduction can be taken. If the second beneficiary is any other individual, such as a child, nephew, niece or other individual, the value of the interest is taxable in the donor's estate if the testamentary power of revocation was retained.
Brandon, age 80, transferred the remainder interest in his $500,000 home to his favorite charity in 2010. Using the AFR at the time, he received a charitable income tax deduction of $397,490. The remaining value of $102,510 represents Brandon's retained life estate interest. Now in 2020, at age 90, he wishes to move into a retirement home and is wondering what will happen to his life estate interest. The house is now worth $550,000. Brandon spoke with his advisor who informs him that even if he moves out of the home, he is able to retain his life estate interest. The life interest would allow Brandon to lease the home to family, friends or a third-party individual, with the charity as a party to the lease. Brandon decided he did not want to become a landlord and wished to explore other options. His advisor explains that the charity and Brandon have a few options. The most compelling options include a joint sale, acceleration of the life estate or converting the life estate to a charitable gift annuity or charitable remainder trust. In 2020, with the house now worth $550,000 and using the current AFR, the value of his life estate interest is $30,541. Brandon discusses his options with the charity.Once the life estate interest expires, the charity will own both the life estate interest and the remainder interest. Thus, the charity owns the property in full under the doctrine of merger. The charity has the option to hold onto the property as an asset or can sell the property. Because the charity is tax exempt under Sec. 501(c)(3), the charity may sell the property without recognizing any capital gain on the sale.
If Brandon were to accelerate the gift by transferring his life estate interest to the charity, the charity would then own both the remainder and life estate interest. The charity would own the home in full and Brandon would receive a charitable income tax deduction of $30,541. This amount is deductible up to 30% of Brandon's adjusted gross income in the year of the gift. This structure will allow the charity to sell the home tax-free and use the proceeds for its charitable mission.
If Brandon were interested in receiving cash instead of an additional charitable deduction, Brandon and the charity could engage in a joint sale of the property. The proceeds of the sale would be apportioned between the two parties based on their respective ownership interests. The life estate interest is valued at $30,541 and the charities' interest is the remaining $519,459. If the home is then sold for $550,000 to a third-party buyer, Brandon would receive $30,541 of the sale proceeds and the charity would receive $519,459. Brandon would have to recognize capital gain for his portion, but may be able to apply the $250,000 capital gains tax exclusion for the sale of his home to zero out his tax. He would not receive any charitable income tax deduction in this scenario, but receives a lump sum of cash.
If instead of a lump sum Brandon wanted income payouts for his life, he could fund a charitable gift annuity or charitable remainder trust with the $30,541 life estate interest. He would also be entitled to a charitable deduction for this structure. The charitable tax deduction would be a lesser value than the $30,541 because of the returned value of the income payouts for life, but he would bypass capital gain. If the $250,000 home sale exclusion is applicable to offset capital gains tax, Brandon may consider selling the life interest and funding the CGA or CRT with the cash proceeds. Cash gifts are deductible at higher limits than appreciated property gifts. This would allow Brandon to take a higher deduction in the year of the gift and receive substantially higher tax-free income payouts over his lifetime.
Surprised by the flexibility of donating the life estate interest, Brandon takes more time to think about what he would like to do. He understands the flexibility of his interest allows him many options each with differing benefits.