The Retained Life Estate (RLE)

As you may know, the 7520 rate continues to drop—once again reaching an all-time low of 2.0% for the month of February. As detailed in the January issue of Planned Giving Essentials, this historically low 7520 rate presents opportunities to leverage the benefits of several planned giving techniques. One such technique, the retained life estate, provides substantially more benefit to the donor in a low interest environment. In this issue, we will examine the eligibility requirements for an RLE, the benefits of the RLE, and an example of a hypothetical RLE gift structure.

RLE Qualification

In order to qualify and obtain the tax benefits associated with an RLE, there are two main requirements. First, the real property subject to the RLE must be a personal residence or a farm. However, a personal residence need not be the donor’s primary residence—it can also be a second home or a vacation home. To be classified as a farm, the land must meet specific criteria under applicable law—any land used by a donor or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. Generally, most ranches in Wyoming would qualify. Second, the donor must contribute an irrevocable remainder interest in the residence or farm to the charity.

RLE Tax Benefits

A donor implementing an RLE receives an income tax deduction in the year of the gift that is based upon the discounted value of the remainder interest in the property on the date of the gift. The discounted value is based upon the life expectancy of the donor and the current 7520 rate. All other things being equal, the lower the 7520 rate, the higher the income tax deduction for the donor. In addition, if the donor is potentially subject to estate tax, the RLE provides a charitable estate tax deduction for the value of the remainder passing to the charity upon death.

RLE Example

Debbie, age 75, owns a vacation home in Scottsdale, Arizona, valued at $450,000. She and her husband, who recently passed away, purchased the home many years ago for $225,000. Debbie would like to continue to use the home for the remainder of her life. She has already provided for her children in her estate plan in a significant manner and, in addition, would like to structure a gift with the University of Wyoming Foundation using the vacation home. She could simply leave the home to the UW Foundation in her Last Will and Testament. However, she would forego the benefit of a current income tax deduction and, more importantly, the life-time satisfaction of making a major commitment to UW. After talking with the planned giving department at the UW Foundation and her estate planning attorney and CPA, Debbie decided to convey the vacation home to the UW Foundation while retaining a life estate in the property. The UW Foundation and Debbie execute a Retained Life Estate Agreement detailing the rights and responsibilities of each party.

Debbie will continue to use the residence and to maintain it as usual, paying the costs of repair and maintenance, insurance, and property taxes. And, as a result of this gift, Debbie is entitled to an income tax deduction of $323,888 in 2009. The gift will also trigger state-matching funds equivalent to the present value of the remainder interest—the $323,888. The state-match portion immediately will become available as an endowment to fund the programs that Debbie wishes to benefit at UW. Upon her death, the vacation home passes to the UW Foundation, who will liquidate the property and add the net proceeds to Debbie’s endowment.

Call Tracy R. Richardson, Director of Planned Giving, at 307-766-3934 or e-mail, trichar6@uwyo.edu, for more information about Retained Life Estates or any other planned giving opportunities at UW.