Case of the Week

Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.

Karl Hendricks owns a comfortable home that has a value of $1 million. He enjoys his home and plans to live there for many years. He purchased the home years ago for $400,000.

Karl plans to leave the home as a bequest to favorite charity when he passes away. In discussions with the development director from favorite charity, Karl discovered that he could also receive a very substantial tax benefit by creating a life estate.

Question:

Should Karl deed the remainder to favorite charity and plan to live the rest of his life in his home? What if he later decides to move to a retirement center? Are there good options in that case?

Solution:

A life estate is a plan that allows Karl to live in his home for life and to deed the remainder to charity. Because he is living in the home, Karl also will have to pay the maintenance, insurance and taxes on the property.

By deeding the remainder to charity and reserving the life use for himself, Karl receives a charitable deduction of $823,184. He will be able to deduct this over the next five years and could enjoy tax savings of $271,651. When he passes away, the property will be transferred to charity.

Karl is very pleased with this plan. He is able to live in his home for his lifetime and he will save taxes of about $54,000 each year for the next five years. With his tax savings, Karl plans to take a cruise every year.

If Karl later decides to move from his home into a retirement community, there are several options available. Based on the value of his home and the value of his life estate at that time, Karl could work with favorite charity to select the best option.

Karl and the charity could jointly sell the house and Karl could receive the cash equal to the present value of his life estate. If he does not need additional income, Karl could give the life estate to charity and receive an additional charitable deduction. Other options include transferring his life estate interest into a charitable remainder trust or gift annuity for the balance of his life. Under the tax code, he may not make a commitment to any of these plans until he decides to move. Waiting to make this decision preserves the flexibility of his plan.

Karl is very pleased with his life estate as he plans for his next cruise.