What are Life Estates and How are They Used in Planned Giving?
September 17th, 2012
Life estates are a useful tool for making a substantial gift to charity by donating your home or farm without having to vacate the property or give up any benefits your currently enjoy from the property. You’ll receive a charitable tax deduction up front for the donation to charity, but the gift’s benefits and responsibilities remain yours until the time of your choosing, which is usually after the donors’ death.
The Ohio planned giving attorneys at Gudorf Law Group may recommend giving in this way to someone who wants to make a substantial gift to charity and either doesn’t have other resources to give or needs a way to dispose of their home or farm after death. Usually, these clients either don’t have children or their children are well off and don’t need to inherit the property.
Life estates are also known as gifts of charitable remainder when a charity receives the property. Ownership of the real property is transferred to the charity with the agreement that the donor may continue living on and using the property until the donor’s death. Upon death of the donor, the charity takes full ownership and responsibility of the property. The agreement can also be structured so that the property passes to the charity upon the death of another person or multiple people (i.e. the donor and his/her spouse) or after a specific period of time.
Benefits of Using Life Estates to Donate Property to Charity
The benefits of giving to charity with gifts of property through life estates include:
- Charitable tax deduction from income taxes for up to 30% of the donor’s annual income with excess deduction carried forward up to five years
- Avoidance of capital gains tax on appreciated value of the real property
- Reduction in gift or estate taxes
- Continue enjoying benefits of property, including any income generated by the property such as rent payments
- Property avoids probate and associated costs
- Can be used to dispose of debt-encumbered property (though charitable tax deductions are significantly reduced)
- Satisfaction of making substantial, meaningful contribution to a charity with gifts of real property
- In many cases the charity will use the gifted property for a particular purpose as directed by the donor
When considering donating property through a life estate, be aware that the donor or other resident is responsible for all ongoing property taxes and maintenance of the property while they are living on it. The donor or resident cannot damage or devalue the property or let it fall into disrepair. The donor or resident also cannot sell the property unless it is done with the cooperation and approval of the charity.
Life Estates Combined with Gift Annuities — Tax Deduction + Income
Life estates can sometimes be combined with a gift annuity to provide the donor with additional annual income for the remainder of his or her life. As part of the gift agreement, the charity agrees to pay the donor back a part of the property’s value each year. The charitable tax deductions are less in this case because the net value donated to the charity is less, but it can be a good way to provide additional retirement income for some people. The amount of the payments from the charity depends on the value of the property and the life expectancy of the donor.
Is a life estate right for you?
There are many things to consider before giving charity gifts through a life estate. In Ohio, the planned giving attorneys at Gudorf Law Group, LLC, can help you determine whether a life estate makes sense for you and assist with other aspects of charitable planning. Arrange a free consultation with our Ohio planned giving attorneys by calling 1-877-483-6730.
Tags: Life Estates