Guide to Life Estate Gifts

I’ve been getting more and more questions from clients about Life Estate gifts. Many people have real estate they do not wish to leave to heirs at their passing and they’re looking for options. A life estate is pretty simple, in theory. A donor gives their residence, vacation property, or farm to charity and reserves the right to use the property for their lifetime. That “right to use” is called a Life Estate. The donor could grant a Life Estate to someone else, such as a child, friend, or family member. When the Life Estate holder passes away, the charity takes possession of the property and does what they want with it – keep or sell – it’s up to them.

The donor makes the gift by use of a Deed. Ownership is transferred to the charity, but the Deed contains specific language reserving the right for the donor (or other named person(s)) to use the property for their lifetime. This is a completed gift for tax purposes – meaning the donor is entitled to an income tax deduction when the deed is delivered to the charity or recorded at the county land office (could be either depending on state law).

How can there be a completed gift when the donor is still using the property? The answer lies in the nature of real estate. The “rights” to real estate can be divided among different parties. One person can own the “fee title” (legal ownership), while another person can own the “possessory interest” (right to use). Few assets can be owned this way, which is what makes the Life Estate such a unique kind of gift.

How should a charity evaluate the property prior to the gift? I recommend that a charity performs the same level of due diligence on a Life Estate gift as they would on a standard outright gift of real estate. They should evaluate for all the same risks. The property should meet the charity’s gift minimum value as well. You want to make sure that any real estate that you accept is in your best interest. [You can find a Real Estate Gift Questionnaire in my book. It will help you collect all the necessary information to help you evaluate any proposed gift of real estate.]

Who is responsible for the real estate after the gift? This is an excellent question. It’s up to the donor and the charity to come to an agreement about who takes care of and pays for the property during the period of the Life Estate. In most cases, the Life Estate holder will be responsible for the care and maintenance of the property. They will also be responsible for paying the property taxes and be required to maintain proper homeowner’s insurance. I recommend to all my clients that they enter into a Life Estate Agreement with donor/life estate holder. This is a document that outlines all the responsibilities of the donor and the charity during the term of the Life Estate. This ensures that everyone is literally on the same page as to who is responsible for what.

How should charities steward a Life Estate Gift after it has been made? Even though the gift is irrevocable, it is vital that the charity keeps in close contact with the Life Estate holder. They should make regular visits to the property to meet with the residents and to see the current condition of the property. After all, the charity will receive possession of the property at some point in the future – regardless of its condition. Hopefully, the residents are able to take good care of the property, but sometimes that isn’t possible. Sometimes they need or want to move out. Maybe they need to move to a smaller home or an assisted living facility.

What happens if the Life Estate holder wants/needs to move out? This happens frequently and is not a problem. There are a couple options the resident and the charity can consider.

  1. The resident donates the remainder of her Life Estate to the charity and moves out. The charity takes possession of the property and does what they want with it. The resident is entitled to a charitable income tax deduction for the remaining value of the Life Estate because it is something of financial value and she is giving it to charity.
  2. The resident and the charity jointly sell the property to a buyer. At closing – both parties walk away with a portion of the sales proceeds. Their respective portions depend on the ratio of value attributed to the Life Estate and Fee Title interests. This can usually be calculated with standard gift planning software, such as PGCalc or Crescendo.

Gifts of real estate in any form is unique. No to properties are identical, so they will all come with their own personality, set of risks and opportunities. A Life Estate can be a wonderful giving solution for both donor and charity. It allows the donor to simplify her estate. The real estate won’t go through probate or need to be managed by her executor. She can continue to enjoy the property as long as she likes – knowing that it will be used for a good cause when she no longer needs/wants it. The charity can look forward to a valuable future gift and share the inspiring story with others who may want to discuss giving options for their own property.

Leave a Comment