Case: Rhea Jones, 75, lives in a beautiful coastal town in northern California.
Rhea's home occupies three magnificent acres of bluff property that
overlooks the crashing waves of the Pacific. Since her home sits just
steps away from the dramatic cliffs, Rhea frequently jokes to her friends
about her "living on the edge" lifestyle.
John, Rhea's husband of 50 years, built the custom home ten years
ago. It was truly the realization of a lifelong dream of John and Rhea.
Unfortunately, John passed away unexpectedly five years ago. Now, Rhea
lives alone in the large home, nevertheless, she is looking forward to
spending her remaining days there. Not surprisingly, she frequently plays
host to her children, grandchildren and friends.
Rhea is an active philanthropist. In fact, she spends three days a week
volunteering with local charities. While very wealthy and philanthropic,
Rhea makes only modest yearly gifts. However, she intends to make a substantial
bequest upon her death. Specifically, Rhea plans on distributing her entire
estate to her children and grandchildren, except for her cliff-side home.
Rhea's will provides that the home passes to John and Rhea's favorite
charity upon her death. The home is worth $3 million.
However, at a recent estate planning presentation, Rhea discovered the
benefits of a gift of a remainder interest in a personal residence. In
particular, she liked the potential significant tax savings and the home's
avoidance of the probate process. Also, because the gift is irrevocable,
the local charity would recognize and honor Rhea for her generous gift
at the annual fund raising gala. Of course, Rhea retains the right to
live in her home for the rest of her life, which is her absolute requirement
to any potential gift arrangement.
Question: Rhea is very excited about this gift arrangement, but she has many questions.
Before she commits to the gift plan, she wants to address several issues.
First, how is the transfer of the home accomplished? Is a trust involved?
Is a contract required?
Solution: An individual may receive a charitable income tax deduction for the gift
of a remainder interest in a personal residence or farm. See Sec. 170(f)(3)(B)(i).
Specifically, Rhea would deed the home to the qualified charity but reserve
a life estate in the property. For simplicity, a quitclaim deed may be
used. In the alternative, a warranty deed or similar deed may be used.
After the deed transfer, the deed should be recorded. This process is
very similar to any other transfer of property, except for the lack of
consideration (i.e., money changing hands) and the reservation of a life
estate in the home.
A charitable trust is not part of this gift plan. However, a contract
is commonly an additional part of this gift plan. Under the common law
of most states, Rhea, the life tenant, is obligated to maintain the home
during her life. However, it is prudent to create a written agreement
that clarifies the roles and responsibilities of both Rhea and the charity.
The written agreement, called a maintenance, insurance and taxes ("MIT")
agreement, defines the responsibilities of Rhea as life tenant. Specifically,
Rhea maintains the property in its current condition. Since she is residing
in the property, Rhea also maintains insurance and pays the real estate
taxes. A sample MIT agreement is available in GiftLaw Pro Chapter 3.7.2.
Editor's Note: While Rhea is required to maintain insurance, many charities take the
additional precaution of adding the home to their master insurance list.
On another note, the deed of the remainder interest in the home to charity
must not be restricted. When Rhea passes away, the charity must receive
title to the home. If the charity does not receive an unrestricted right
to the property, Rhea's deduction could be denied.
George's "UT to Green Gift Annuity" Conversion