RETAINED LIFE ESTATE

What is a Retained Life Estate?
A retained life estate is a gift plan defined by federal tax law that allows you to donate your home or farm while retaining the right to live in it for the rest of your life.

There are few assets that provide the combination of life enjoyment, tax advantages, and investment potential that real estate offers. On the other hand, there are few assets that can, for practical purposes, tie up such a sizable portion of your net worth. The “Retained Life Estate” arrangement is an opportunity to continue living in or using your home, vacation home, or farm while also establishing a gift now – and enjoy the benefits, including current tax savings, that usually characterize only lifetime charitable gifts.

Why fund a charitable gift with real estate?
Unless you sell the property, your options for receiving current financial benefits from the real estate are usually limited to increasing your debt or renting the property to someone else.Real property can also be a significant hassle for estate planning, since it is rarely practical to transfer a single property to more than one heir. The result is a choice between leaving inequitable benefits for heirs and placing the burden – and costs – of selling the property onto your executor and estate. Property located in different states may be subject to additional probate and transfer costs.

How can I get paid for enjoying my real property?
The “retained life estate” arrangement is an opportunity to fund a charitable gift with your home, vacation home, or farm. While nothing changes in your current lifestyle or use of the property, the retained life estate arrangement generates a sizable income tax deduction for you in the year you establish the gift. At the end of the retained life estate term (usually your lifetime or joint lifetimes), the property goes to the BSA as the charitable recipient. This is just the basic form of a retained life estate arrangement. There are some interesting, additional opportunities outlined below.

Example:
Mary and Doug have lived on the family farm for 40+ years. Their Wills include a provision that the Botanical Society of America will receive the farm at the death of the last-living partner. This arrangement does not provide any current tax deduction for her.

As an alternative, Mary and Doug decide to give the farm to the Botanical Society now, while retaining the right to live on the property for life. Given the farm’s current value of $500,000, they will be entitled to a current income tax charitable deduction of over $200,000, which is the value of BSA’s remainder interest .

By creating the retained life estate, Mary and Doug accelerate their gift and enjoy a large tax bonus without changing her lifestyle. Remember, results in this example may vary based on time of gift and other factors.