Gifts of Remainder Interests in Homes and Farms

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These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com

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Gifts of Remainder Interests in Homes and Farms

  1. 1. Remainder Interests in Homes and Farms
  2. 2. All slides are taken from this book which includes detailed explanations of all concepts. Available from Amazon.com Full color version available at www.createspace.com/4707238
  3. 3. A partial interest gift with retained interests occurs when a donor gives some rights to property but keeps others
  4. 4. Normally, donor can’t keep some rights and deduct a partial interest gift
  5. 5. But, you can deduct a remainder interest in a home or farm Other Exceptions • Giving all or an “undivided portion” of a property interest • Charitable remainder/ lead trust or pooled income fund • Qualified conservation easement
  6. 6. A remainder interest gives the right to own the property after a set time or after the death of a person
  7. 7. Unlike a will, a remainder interest is not revocable, and can even be sold Remainder Interest
  8. 8. A deductible remainder interest in farmland or a personal residence must be transferred by deed, not by trust or contract
  9. 9. A farm is any land and improvements used (even by a tenant) to raise crops or livestock
  10. 10. A remainder interest in any part of a farm may be gifted (Rev. Rul. 78-303)
  11. 11. Can I give a remainder interest of an undivided share in farmland? 12.5% 25%
  12. 12. Yes, donor may deduct a remainder interest shared by charity and others as tenants in common (Rev. Rule 87-37) 12.5% 25%
  13. 13. However, IRS may deduct cost of partitioning (of forcing a sale or division) 12.5% 25%
  14. 14. • No deduction for remainder just in mineral rights because it is not a “farm” Reg. 1.170A-7(b)(4) • Can gift remainder in entire “fee simple” farm (even if land and mineral rights go to separate charities)PLR 8316037 • Can gift remainder in farm without mineral rights if you don’t owned them Mineral Rights
  15. 15. How do you calculate the deduction for a remainder interest in farmland? 1. Find the §7520 interest rate www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-7520-Interest-Rates 2. Multiply value of land by remainder percentage for that interest rate (from IRS Pub. 1457 for one or two lives or specific term) www.irs.gov/Retirement-Plans/Actuarial-Tables
  16. 16. Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor on 10/1/13 1. Find the §7520 interest rate www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-7520-Interest-Rates Choose the interest rate from the current or the previous two months
  17. 17. Charitable Deduction
  18. 18. Charitable deduction for remainder interest deed in $1,000,000 of farmland by age 59 donor 1.0% (Jan 13) $804,790 11.6% (May 89) $156,840
  19. 19. Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor on 10/1/13 1. Find the §7520 interest rate www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-7520-Interest-Rates Choosing the lowest rate creates the highest deduction, so here we select 2.0%
  20. 20. 2. Multiply value of land by remainder percentage for that interest rate www.irs.gov/Retirement-Plans/Actuarial-Tables Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor on 10/1/13 Because here the remainder goes to charity after a single life, download Table S. For two lives use table R(2) instead
  21. 21. Table S - Based on Life Table 2000CM Interest at 2.0 Percent Life Life Age Annuity Estate Remainder Age Annuity Estate Remainder 0 38.3436 0.76687 0.23313 55 19.1825 0.38365 0.61635 1 38.3807 0.76761 0.23239 56 18.6933 0.37387 0.62613 2 38.1678 0.76336 0.23664 57 18.2034 0.36407 0.63593 3 37.9440 0.75888 0.24112 58 17.7136 0.35427 0.64573 4 37.7125 0.75425 0.24575 59 17.2236 0.34447 0.65553 Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor on 10/1/13 Scroll down to the part of the table for the selected §7520 rate (2.0%) Find the remainder percentage for the age of the donor (59)
  22. 22. Remainder % X Farmland value Deduction Ex: A remainder interest in $100,000 of farmland given by a 59 year old donor on 10/1/13 .65553 X $100,000 $65,553
  23. 23. Leaving land to charity by will •Revocable •$0 tax deduction •Impacts charity after death Leaving land to charity by remainder deed •Irrevocable •$65,553 immediate income tax deduction •Impacts charity after death or immediately if charity sells remainder interest •Immediately increases cash assets available for income producing investments
  24. 24. Because farmland can be gifted in parts, a donor could annually give remainder interest shares up to income limits or desired marginal tax rate •Allows for increasing valuation each year •Avoids risk of losing carryover deduction at death •Could use value of annual deductions to pay for ILIT life insurance passing tax free to heirs
  25. 25. Donor can use money from remainder gift tax deduction to buy tax free life insurance (ILIT) for children’s inheritance [aka “wealth replacement trust”]
  26. 26. remainder interest in farmland given to charity $65,553 deduction x (39.6% fed + 5% state) = $29,236 $29,236 buys est. $70,000 paid up ILIT life insurance children receive $70,000 (tax free from ILIT) will divides farmland 10% to charity 90% to children charity receives $12,500 (10% x $125,000) children receive $67,500 (90% x 125,000 = 112,500, less 40% for estate taxes) charity receives $125,000 farmland farmland worth $125,000 at death Age 59 wealthy donor with $100,000 farmland
  27. 27. Gifts of remainder interests in the donor’s personal residences can also be deducted Remainder Interest
  28. 28. Includes second homes, vacation homes, even a boat with bathroom, cooking, and sleeping facilities, if used by the donor as a residence
  29. 29. Deduction for a remainder interest in a house is less than for land because houses wear out
  30. 30. 59 year old donor giving on 10/1/13 Remainder interest in $100,000 farm .65553 x $100,000 $65,553 Deduction .29603 is the Depreciation Reduction Factor Remainder interest in $100,000 home .65553 x $20,000 (land) .65553 x $10,000 (salvage) (.65553-.29603)x $70,000 $44,831 Deduction
  31. 31. Depreciation reduction factor R factor age – R factor age after useful life of house D factor age X Useful life of house* Table C at www.irs.gov/pub/irs-tege/table_c_2009.xls See IRS Pub. 1459 http://www.irs.gov/pub/irs-pdf/p1459.pdf Ex: 59 year old donor giving on 10/1/13 R factor@59 – R factor@104 D factor@59 X 45 Table C(2.0) Factors for Reducing Assurances - Based on Table 2000CM Interest at 2.0 Percent Age R-Factors D-Factors x Rx-0.5Mx Dx 59 366311.5 27494.35 … … … 104 51.23390 31.62524 366311.5–51.23390 27494.35 X 45 =.29603 *An appraiser can estimate the useful life of a house. IRS examples use 45 years.
  32. 32. Underlying formula gives same result i.e., it equals remainder factor – depreciation reduction factor n = the building’s estimated useful life, e.g. 45 i = the 7520 interest rate, e.g. 0.02 v = 1/(1+ the 7520 interest rate), e.g. 1/1.02 x = the age of the life tenant, e.g., 59 lx = expected number of persons living at age x out of 100,000 births as set forth in Table 2000CM (available for download at http://www.irs.gov/Retirement-Plans/Actuarial-Tables) Present value of the future amount in the middle of each year % chance of donor death in each year of building’s remaining life % of value remaining in the middle of each year
  33. 33. Formula required to calculate factor for the depreciable part for two lives n = the building’s estimated useful life, e.g. 45 i = the 7520 interest rate, e.g. 0.02 V = 1/(1+ the 7520 interest rate), e.g. 1/1.02 x & y = the ages of the life tenants, e.g., 59 & 62 lx & ly = the number of persons living at ages x and y in Table 2000CM (http://www.irs.gov/Retirement- Plans/Actuarial-Tables) Or, for an actual contribution, you can ask the IRS to calculate this for you
  34. 34. For a fixed term, just assume value of depreciable part reduced by (term/useful life) Ex: In 20 years house will be valued at $20,000 land + $10,000 salvage + [$70,000 x (20/45)], or $61,111. Deduction is $61,111 X remainder value for 20 year term certain from table B www.irs.gov/Retirement-Plans/Actuarial-Tables
  35. 35. What if the donor leaves?
  36. 36. What if the donor leaves? Agree with the charity to a joint sale and divide proceeds Give life estate to charity in exchange for a gift annuity Give life estate to charity Rent property Sell life estate
  37. 37. Will the donor maintain the property?
  38. 38. Will the donor maintain the property?
  39. 39. What if I make improvements to my residence after giving a remainder interest?
  40. 40. Can deduct the remainder value of major improvements as additional giftsPLR 9329017; PLR 8529014
  41. 41. Charitable gifts of remainder interests in homes and farms
  42. 42. Help me HERE convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise donors and you reviewed these slides, please let me know by clicking
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  44. 44. This slide set is from the curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning. To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/ Graduate Studies in Charitable Financial Planning at Texas Tech University

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