BDQ #10: Retained Life Estates – Who Says You Can’t Have Your Cake and Eat It Too?

No doubt you, as a gift planner, know why a gift of appreciated property is more advantageous than a gift of cash. You’ve even said something like, “Cash is the worst thing you can give. Don’t you have anything that’s worth more than you paid for it?”

For many donors, their home is one of the most highly appreciated assets they will ever own. But there’s a rub: their home is also highly useful as a personal residence and, if they give it away, they’ll have to find another place to live. So, donors aren’t encouraged to think of their home as a potential contribution.

But what if there was a way for your donor to give their personal residence now and continue to live there and enjoy it for the rest of their lives? Enter the redoubtable but often overlooked Retained Life Estate. This gift plan allows your donor to contribute their personal residence now but continue to use the property for the rest of their lifetime. They’ll get an income tax deduction now and, if they decide to move out before the end of their lifetime, they can get an additional income tax deduction then.

After they’ve made their Retained Life Estate contribution, your donor will continue to be responsible for property taxes, insurance, and maintenance – just as they were before they made the gift. Then, at the end of your donor’s lifetime, your organization takes full possession of the property and can choose to sell or use it in support of your mission.

There are some special considerations with a Retained Life Estate gift. The essential documentation of the gift is a recorded deed and a written agreement between the donor and the charity. There aren’t many useful templates or forms, so you will need to work with an attorney knowledgeable about real estate law for the state where the property is located. The agreement should outline each party’s responsibilities and make clear the maintenance standards expected of the donor. The charity should have the right to inspect the property from time to time … and then it’s a good practice to visit the property periodically too!

As with any gift of real estate, environmental liability is a concern. Your organization’s gift acceptance policy may require an environmental audit before you can accept the gift, and you might include responsibility for environmental remediation in the gift agreement.

“But,” your donor will wonder, “what happens if I decide to leave before the end of my lifetime?” Your first answer should be, “In that case your gift will come to us even sooner, and you’ll have the joy of seeing your generosity at work while you’re still here. And you will receive an additional income tax charitable deduction, too. Let me calculate that for you.”  However, depending upon the circumstances, there are other options that might be negotiated including selling the property and splitting the proceeds or, if allowed by state regulations, issuing a gift annuity based upon the value of the life estate at that time.

Finally, there’s quite a range of properties donors can contribute subject to a Retained Life Estate – it need not be the donor’s primary residence, just a personal residence or a farm. Perhaps your donor owns a vacation home used only a few times a year and their children aren’t interested in inheriting it. Or, planning for future expansion, your organization would like to acquire certain properties. In both cases a Retained Life Estate could be just the ticket.

You can, in fact, have your cake and eat it too with the amazingly versatile Retained Life Estate.