InKnowVision May 2013 HNW Technical PPT

Technical Webinar
©2013. InKnowVision LLC. All rights reserved. www.inknowvision.com

I N K N O W V I S I O N , L L C
S C O T T H A M I L T O N , J D , C E O
W W W . I N K N O W V I S I O N . C O M
6 3 0 - 5 9 6 - 5 0 9 0
Charitable Life Estates
© 2012 InKnowVision, LLC

Case Study
 77 and 74 year old
 House worth 4.5M
 Deduction-$4M+
 Tax Savings-$1.8M

Why Do a Charitable Life Estate
 Income tax deduction for client
 No change in lifestyle
 Satisfy charitable giving intent

When would you use it?
 Owner does not care about keeping home in family
 Can benefit from current income tax deduction
 Has some charitable intent
 Can replace some or all of the gift with life insurance

When would you not use it?
 Owner cares about keeping home in family
 Cannot benefit from current income tax deduction
 Has no charitable intent
 Cannot replace some or all of the gift with life
insurance

What Type of Property Qualifies?
 Any property used by the taxpayer as a personal
residence even though it is not used as the principal
residence.
 Single family homes
 Condos
 Co-ops

What Type of Property Qualifies?
 QPRT definition may apply to include
 mobile home
 Boat
 house trailer if
 contains sleeping space, toilet, and cooking facilities

Farms
 Farm means any land used by the taxpayer or his tenant for
the production of crops, fruits, or other agricultural
products or for the sustenance of livestock.
 Includes improvements
 Not limited to house
like barns, house, etc
and reasonable land
like a QPRT

Can cost of furnishings be deducted?
 No

Is rental property OK?
 Yes
 Ltr. Rul. 8711038

How do you do it?
 Deed - Irrevocable transfer of property to charity
 Reservation of life estate

Agreement
 Life Tenants
 Who are they?
 Are their more than one?
 Is there a line of succession?
 Term of Year
 Who are tenants?
 Successor tenants

Other Agreement Terms
 Who maintains the premises
 Who insures the property against loss and liability
 Who repairs the premises in the event of damage
 Prohibition on additional liens or encumbrances

Agreement Terms
 What if life tenant wants to sublet
 Vacate
 Sell with or without repurchase
 Access for periodic inspection

Additional Items
 Obtain clear title
 Environmental concerns
 Property tax valuation and transfer tax expense

The Deduction
 The donor is entitled to a
charitable contribution
income tax deduction in
an amount equal to the
net present value of the
charitable remainder
interest.

Deduction Calculation Elements
 FMVof the property
 FMV of depreciable property
 Estimated useful life of the depreciable property
 Salvage value of the depreciable improvements
 Measuring term of the agreement and
 AFR

FMV of Property
 If over $5,000, must have a qualified appraisal
 FMV reduced by any indebtedness

Depreciable Property
 If any part of the real property is subject to
exhaustion, wear and tear, or obsolescence, a special
factor is used in valuing the remainder interest in
that part
 Depreciation computed using straight-line over the
asset's useful life

Estimated Useful Life
 How long will the depreciable part of property be
useful for its intended purpose?
 OK to use depreciation schedule for similar property
 27.5 years for residential property

Salvage Value
 What will the depreciable property be worth at the
end of the useful life?

What is the Term?
 Term of years or measuring life?
 Terminal illness (7520)

Calculator

I want to leave-what are my options?
 Rent
 Sell
 Gift

Options
 Rent the property
 Income comes to life tenant

Options
 Sell the property
 Replace the property sold
 Buy new property subject to life estate
 No replacement
 Divide proceeds

Options
 Accelerate the gift

What about capital improvements?
 Treated as an additional contribution
 Additional tax deduction

Bargain Sale of Remainder Interest
 Part gift/sale of remainder interest
 Charity pays cash
 Reduces tax deduction
 May cause gain to be recognized

Debt Encumbered Property
 If the transferred property is subject to indebtedness,
however, the transaction is subject to the bargain
sale rules.
 When debt encumbered property is transferred to
charity by outright gift, the entire amount of the
indebtedness is considered an amount realized by
the donor.

Application of $250,000 Capital Gain Exclusion
 Yes

Gift Tax Return
 Yes

InKnowVision – Next Steps
 Set up a call to discuss our process 630-596-5090
 Check out our website www.inknowvision.com
 Join our newsletter list
 Join our LinkedIn group
 Call us about a case

InKnowVision May 2013 HNW Technical PPT

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InKnowVision May 2013 HNW Technical PPT