The donor-owner of a personal residence (or farm) may give the real estate to a charity while retaining the right to occupy the residence or operate the farm for life or a specific term. To qualify for this gifting option, the residence can be either the donor’s principal residence or property used as a personal residence—such as a vacation home. To qualify as a farm, the use of the property must be by the donor or a tenant for agricultural production or raising livestock. After the arrangement, all rights in the property are transferred to the charity (the “charitable remainderman”). The duration of the life estate can be measured by the life of one or more individuals, by a fixed term of years, or by a combination of the two. Most frequently, they are established to operate for the life or lives of the residents of the contributed property.
Life estate agreements are ideal planning vehicles for individuals who desire to make a testamentary gift of real property to charity, yet enjoy continuing to live in the residence and get a current and potentially substantial charitable income tax deduction. The result of freeing up these tax dollars for the donor is more spendable income without causing any reduction in the donor’s lifestyle. Furthermore, this gifting option allows the donor to avoid any potential capital gains tax on appreciation of the property.
Donor wants to remain in residence
Donor wants an income tax deduction
Donor doesn’t want to part with the asset while alive
Donor receives philanthropic recognition
Where It Works
The donor-owner may gift real estate to a charity while retaining the right to continue living in the residence for life or a specific time period.