Contemplating an estate plan is a little bit like trying to construct a jigsaw puzzle: The clearer the picture is that you have of the desired outcome, the easier it is to construct. Often, a piece of the puzzle that is overlooked is the residence.
Many parents mistakenly believe that their children will “want the home.” In today’s environment, it’s more likely that the family is geographically dispersed and the children would be more pleased with receiving the value of the home and its important and memorable contents, rather than the house itself.
The charitable life estate
If the older generation is charitably inclined, it might consider using an often overlooked strategy: the charitable life estate. This article will discuss some of the advantages of this planning technique.
A charitable life estate is a gift agreement between a donor and a charity, involving either a residence or farm, whereby the donor gifts the property to charity but retains the right to live in the property, usually until death. This arrangement has several advantages for the donor.
First, and most importantly, the technique may satisfy a desired charitable intent. Most gifts are still made by bequest and using the family residence may afford a simple solution to fulfill that need. Homes aren’t income-producing; and, in fact, the donor won’t notice any change in lifestyle based on the gift.
Second, the charitable life estate arrangement provides an immediate income tax benefit. Since there is a completed gift to charity, an immediate income tax deduction is available to the donor. The deduction is not for the full value of the residence but for the value of the remainder that will pass to charity at the donor’s death.
This computation is somewhat complex but is easily accomplished with different software packages available. Of course, the residence must be professionally appraised to determine the current fair market value before the computation is made.
Having the benefit of a charitable income tax deduction available may allow the donor to better time other transactions, such as the sale of appreciated securities. For instance, the deduction may offset the impact of a large capital gain. Furthermore, like other charitable deductions, any unused amount may be carried forward for an additional five years.