With home prices falling and real estate markets down, more of your senior donors are deciding to remain in their homes. Contractors report remodels are on the rise with additions that include first floor living quarters and bathrooms equipped with safety-bars for those desiring to maximize in-home longevity.

The prospect of more and more of your donors wishing to remain in their homes presents the perfect opportunity for marketing a charitable life estate gift. The goal of this article is to cover the basics of life estates and address some of the gift acceptance issues including MIT agreements and life estate rollover options.

Life Estate Basics

The Life Estate Agreement

A life estate is an agreement made through a written deed that transfers a remainder interest in a donor's personal residence, farm or ranch to charity. A clause in the deed permits the donor to reserve life use of the property. The donor may remain living in the home during the donor's lifetime and the gift of the remainder interest in the property qualifies for a current income tax charitable deduction.

Personal Residence Requirement

A life estate is not limited to the donor's principal residence. It may be written on any property used by the donor as a personal residence, including a vacation residence, or even stock owned in a cooperative housing corporation. A remainder interest in a farm also qualifies. A farm is defined as property used for the production of crops or grazing land for cattle and includes fixtures such as buildings and permanent improvements. Normally, the transfer of a residence will also include reasonable surrounding grounds.

MIT Agreements

Maintenance, Insurance and Taxes (MIT)

One concern charities often raise regarding the life estate is whether a life tenant will satisfactorily maintain the premises so that the gift holds its value and potentially appreciates. We've all heard the stories of donors who promised to make a future gift of property to charity only to have the charity receive it in run-down condition. While the common law of most states obligates a life tenant to maintain the property, carry insurance and pay property taxes, an MIT agreement is recommended to define the responsibilities of any life tenant.

The MIT agreement obligates the donor to maintain the property in its current condition. The donor is also required to carry insurance and pay the real estate taxes. While the donor is required to maintain insurance on the property, many charities take the additional precaution of adding real property gifts to their master insurance list.

Leasing the Property

While the life estate donor plans to remain living in the residence, unforeseen circumstances may require that the donor move to a smaller residence, assisted living or retirement facility. In this situation, the life estate will not necessarily be dissolved. The life tenant may move out, rent the property and make use of the rental income.

If the donor opts to lease the property, the MIT agreement should grant the charity the right to approve any parties who would lease the residence. As the future property owner, the charity has an interest in ensuring that the tenant maintains the property in its current condition. The MIT agreement should also clarify that when the donor passes away, all lease income goes to charity for the duration of the lease.

Capital Improvements

Who pays for improvements made to a life estate residence? Generally, the donor is responsible for maintenance on the wear and tear of the premises and must maintain the premises in its condition at the time of the gift. However, if the improvements add to the value of the residence, it is permissible to request that the charity share in the cost.

If a charity wishes to avoid paying for capital improvements, it should spell this out in the MIT agreement. If the donor decides to bear the full cost of the capital improvement, the donor may take an additional charitable deduction for the remainder value of the addition.

Liability Issues

An MIT agreement should also address what happens if there is damage to the property or an injury takes place on the premises. This is a question of liability or who bears risk of loss. In the event of damage to the property, the donor ordinarily bears the expense and is required to repair the property unless the MIT agreement states that the donor and charity agree otherwise. Some charities add life estate gifts to their master property insurance policy.

The MIT agreement may be drafted to state that the donor and charity share the cost of repairing damage to the property. If this provision is included, any insurance proceeds resulting from damage should be divided between the charity and donor in proportion to the value of their respective interests as of the date of damage. The MIT agreement may also be drafted to include a hold harmless provision stating that the charity desires to absolve itself of all liability arising from the property during the donor's lifetime.

It is clear that a well-crafted MIT agreement is essential to defining the responsibilities between the donor and charity and ensures that the charity receives the value promised and is not subjected to needless liability. More information on MIT agreements as well as a sample agreement for your use is available in Crescendo's GiftLaw Pro Chapter 3.7.2A.

Rollover Options

With the prospect that some donors will not live out their lifetimes in the life estate residence, there are several life estate exit or rollover options to consider.

Joint Sale

One option is for the donor and charity to engage in a joint sale of the premises. Once the donor decides to move out, the charity and donor may place the residence on the market. When the property sells, the proceeds are then prorated between the donor and charity in proportion to their respective shares. To determine the values of the donor and charitable interests, rerun your calculation in Crescendo following the directions in GiftLaw Pro, Chapter 6.1.1.

Gift of Life Estate

A donor may wish to give his or her interest or right to life use in the premises to charity. Once the donor's interest is valued and gifted to charity, the charity then owns both the remainder value and the life estate and may sell the home. The donor receives a charitable income tax deduction for the value of the life estate gifted. The gift of an income interest is viewed as a gift of a capital asset with a zero basis, making it deductible as an appreciated property type gift up to 30% of the donor's adjusted gross income (AGI).

Remainder Unitrust

If the donor desires to receive income, a gift of the life interest may be used to fund a charitable remainder unitrust. The donor transfers his or her life interest to the trust and receives income for life and a current charitable income tax deduction for the value of the remainder gifted to charity. The gift is deductible up to 30% of the donor's AGI. An alternative option would be for the donor to sell his or her interest and use the cash to fund a charitable remainder trust. Here, the gift would be treated like a cash gift deductible up to 50% of the donor's AGI.

Gift Annuity

If the donor desires fixed income, the life estate interest may be gifted to create a charitable gift annuity. Assuming that the gift annuity qualifies under the 10% CGA minimum deduction test, it will pay the donor fixed income for life at a rate based on the donor's age. If the donor is able to use the home exclusion for the transfer of the life estate as permitted by Rev. Rul. 84-43, the gift annuity may be treated as though cash was contributed and the donor will receive both a charitable deduction and substantial tax-free income.

Conclusion

Now is the perfect time to market life estates because donors are looking for ways to stay living in their homes. A life estate provides a wonderful opportunity for a donor to make a gift to charity this year and avoid selling a personal residence at a loss.