Why Do Life Estate Gifts Have Great Potential? Community Foundation of the Ozarks  Wednesday, November 29 Why Do Life Estate Gifts Have Great Potential? Douglas R. Nickell 417.886.5912 dnickell@lathropgage.com

May be largest assets in individual donor’s portfolio May be only asset available to fund a charitable gift.

Different kinds of real estate may be the subject of gifts Land – developed or undeveloped, farm property Rental property Personal residence Apartments Motels/hotels Business/commercial property Vacation homes/condo

Different Methods of Making Real Estate Gifts

Outright Immediate use or sale with sale proceeds used by charity

Bargain Sale Sale to charity for less than full FMV with payments over time

Charitable Remainder Trust Provides variable income based on percentage of annual value of trust assets For donor’s lifetime or up to 20-year term

Gift Annuity Fixed payments for life of one or two individuals Amount of payment based on age of income beneficiary at time of gift

Life Estate Agreement Focus of Our Discussion Today Gift of remainder interest in Residence Vacation home Farm Life estate agreement Ideal planning vehicle for Individuals who desire to make a testamentary gift of real estate to charity While continuing to enjoy use of the property for life and enjoying a current and potentially substantial charitable income tax deduction

How a Life Estate Works Deed remainder interest in property to charity now Retain a life estate in the property Donor pays maintenance, taxes and other current costs of ownership Donor gets an income tax deduction now for current value of remainder interest Charity receives proceeds from sale of property upon death of the donor

Life Estate Agreements are Limited Gift of a remainder interest in a personal residence Farm property Vacation home is OK

Gifts of Remainder Interest Can Be Measured Life of one or more individuals A fixed term of years A combination of the two Most common to operate for the life or lives of the residents of the contributed property

Charitable Deduction Equals Net present value of the charitable remainder interest based on FMV of the property on date of transfer as established by independent appraisal FMV of depreciable improvements Estimated useful life of the improvements Salvage value of the improvements Measuring term of the agreement Applicable Federal Midterm Rate in effect for the period of transfer

Sample Present Value Computation

Single life Mrs. Donor, age 70 Transfer remainder interest on 11/1/06 FMV = $250,000 Measured by Mrs. Donor’s life Depreciable portion = $125,000 Estimated useful life of 45 years Salvage value of depreciable portion = $12,500 Applicable Federal Midterm Rate for 11/06 is 5.60% Charitable Deduction for Remainder Interest — $111,593.25

Two lives Mr. and Mrs. Donor, age 75 and 70 Transfer remainder interest on 11/1/06 FMV = $250,000 Measured by longest life expectancy Depreciable portion = $125,000 Estimated useful life of 45 years Salvage value of depreciable portion = $12,500 Applicable Federal Midterm Rate for 11/06 is 5.60% Charitable Deduction for Remainder Interest — $91,224.38

Term of Years Mrs. Donor, age 70 Term of twenty years Transfer remainder interest on 11/1/06 FMV = $250,000 Depreciable portion = $125,000 Estimated useful life of 45 years Salvage value of depreciable portion = $12,500 Applicable Federal Midterm Rate for 11/06 is 5.60% Charitable Deduction for Remainder Interest — $ 67,259.20

Donor Must File Gift Tax Return Even if no tax is due

Benefits to Donor Charitable income tax deduction for net present value of the charitable remainder interest Flexibility Transfer avoids probate at death Removal of property from estate for estate tax Recognition by charity currently for contribution

Benefits to Charity Irrevocable transfer Chance to recognize donors now Flexibility it offers to donors

OCREF Ozarks Charitable Real Estate Foundation Supporting organization owned by CFO Designed to hold real estate gifts 7 managers with experience in real estate adopted formal acceptance guidelines

Requirements Irrevocable transfer Written Life Estate Agreement Qualified appraisal Title insurance commitment Title insurance policy Property inspection and analysis Environmental assessment

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