WHY DO LIFE ESTATE GIFTS HAVE GREAT POTENTIAL

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Community Foundation of the Ozarks 
Wednesday, November 29
Why Do Life Estate GiftsHave Great Potential?
Douglas R. Nickell 417.886.5912 dnickell_at_lathropga
ge.com

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May be largest assets in individual donors
portfolio
May be only asset availableto fund a charitable
gift.
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• 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

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Different Methods of Making Real Estate Gifts
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Outright

• Immediate use or sale with sale proceeds used by
  charity

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Bargain Sale

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

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Charitable Remainder Trust

• Provides variable income based on percentage of
  annual value of trust assets
• For donors lifetime or up to 20-year term

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Gift Annuity

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

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Life Estate AgreementFocus 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

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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

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Life Estate Agreements are Limited

• Gift of a remainder interest in a personal
  residence
• Farm property
• Vacation home is OK

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Gifts of RemainderInterest 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

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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

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Sample PresentValue Computation
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Single life

• Mrs. Donor, age 70
• Transfer remainder interest on 11/1/06
• FMV 250,000
• Measured by Mrs. Donors 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

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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

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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

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Donor Must File Gift Tax Return

• Even if no tax is due

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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

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Benefits to Charity

• Irrevocable transfer
• Chance to recognize donors now
• Flexibility it offers to donors

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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

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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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Questions?
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