I recently returned from Atlanta and the Carter Center. I am pleased to serve on the National Planned Giving Advisory Board of the Carter Center with many nationally recognized leaders in the fields of Estate Planning and Philanthropy.
In our recent meetings, we explored the intricacies of charitable gifts of tangible property, including both real and personal property. We noted that, while now is not a particularly good time to do a Qualified Personal Residence Trust (“QPRT”), it is an exceptionally good time to give a remainder interest in your residence (or farm) to charity. So, now, not only should charity be at home, perhaps it should begin with the home.
With a QPRT, you retain an interest in the property for a number of years and gift the remainder interest in trust to your children or other beneficiaries. Thus, when interest rates are high, the value of the remainder interest is relatively low and when interest rates are low, the value of the remainder interest is relatively high. So, today’s historically low 7520 rate of 2.2% makes QPRTs less effective. However, the low interest rate environment makes the gift of a remainder interest to charity more powerful. When you gift the remainder interest to charity, the lower the interest rate, the higher the value of the remainder interest, and hence the higher the deduction.
It actually makes a surprising difference. For example, let’s say that a 65-year-old client owns a home worth $300,000. (In some areas this might be a nice home, while in others it may be an unrealistically low value.) The value of the remainder interest with today’s 2.2% 7520 rate is $207,558. Just a few years ago, in 2007, the 7520 rate was over 5%. At that time, the remainder interest for a 65-year-old client in a home of the same value would have been worth only $138,000. Hence, the client’s charitable deduction for the exact same gift would have been nearly $80,000 less. In the last 25 years, the rate has been as high as 11.6%. At an 11.6% 7520 rate, the gift of the remainder interest would be worth only $66,417. Thus, a gift of the remainder interest using today’s rates would result in a deduction more than $141,000 higher than at other times in the past 25 years. Again, this would be for the exact same gift.
This works with a gift of a remainder interest in the client’s residence or farm. The client gets a current income tax deduction, as well as an estate tax deduction. Of course, the property is not available for children or other beneficiaries at the client’s death because it has been given away. If the client wishes, they may use the income tax savings generated by the charitable deduction to fund a life insurance policy to replace the value of the property given to charity. (This may be especially attractive with a second-to-die life insurance policy on a married couple.)
For charitably-minded clients, this may be a “home” run. The contribution generates a current income tax deduction (as well as an estate tax deduction). Yet, the client may continue to use the property or receive the income from the farm for the rest of their lives.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com
Steve Hartnett
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