Some planned giving programs will accept gifts of real property through a retained life estate or a charitable remainder trust. Determining which split-interest gift is the right option depends on the needs and interests of the donor and the charity. The two options are described below followed by some questions to help guide you through conversations with your donors about gifts of real property.
Retained Life Estate
When a donor establishes a retained life estate (RLE), real property is contributed to charity, but the donor retains the right to live in the property for the rest of the donor’s life. The value of the property is effectively divided between the right to own it, which passes to the charity, the right to use it, which stays with the donor. The donor receives a charitable deduction based on the present value of the projected value of the property at the end of the donor’s life expectancy.
The retained life estate is an option for a donor who wants to donate real property to charity but has no other place to live. When the donor passes away, the property passes to the charity without the need for probate, although it may be includable in the donor’s estate for the purposes of valuing the estate’s size.
Although the donor expects to live in the property for the rest of their lives, sometimes circumstances lead to the donor moving out earlier. If the donor decides to move out, the retained life estate ends. The donor can receive an additional charitable deduction if they transfer their remaining life interest to the charity, or they could be a party to the sale of the property by the charity, receiving a cash payout from the net sale equivalent to their remaining life interest.
RLEs can present challenges if the donor does not maintain the property during the retained life estate. Even though the charity owns the real property, the donor is responsible for the property including maintenance, real estate taxes, insurance, and utilities. If the donor fails to maintain the property, the charity cannot force the donor to move out. In some cases, the charity will pay the real estate taxes, insurance premiums, or maintenance contractors, such as a landscaper, to help maintain the property’s value.
Charitable Remainder Trust
Another option is to transfer the real property into a charitable remainder trust. When a donor transfers the real property to a charitable remainder trust (CRT), the property ownership is transferred to the trust. The donor may have a beneficial interest in the trust as a beneficiary, but the property is owned by the Trustee of the trust. The CRT is irrevocable, and the real property is removed from the donor’s estate. The donor will receive a charitable deduction for the present value of the remainder interest that will go to the charity.
The CRT is an option if the donor has somewhere else to live and would like to receive income from the trust. By law, the donor cannot live in property that has been transferred to a charitable trust. When the donor passes away the property is transferred to the charity and the trust terminates. The CRT can be terminated early, and the donor may receive an additional charitable deduction for the value of the remaining beneficial interest.
The CRT is a valuable gift option, however, the donor and the charity need to consider the costs associated with creating, managing, and administering the trust. The trust document should be drafted by an attorney. The Trustee may be the donor, the charity, or a third party. The management of the trust assets may involve an investment advisor or a trust administrator.
The type of CRT will affect the payments to the beneficiaries. A charitable remainder annuity trust (CRAT) distributes set annuity payments each year for the life of the trust. The CRAT needs liquid assets to make the annuity payments, and assets cannot be added to a CRAT once it is established. A charitable remainder unitrust (CRUT) calculates the annual unitrust payment amounts based on a set percentage of the trust assets valued each year. Assets can be added to the CRUT during the duration of the trust. There are other flavors of CRUTs: net income, net income with makeup, flip, and flip with makeup which will not be addressed in this article.
Real Property Donation Discussions
When a donor offers to donate real property, the flow chart of questions below may help guide your discussions. As always donors should consult with their tax and financial advisors.
