Two Gifts–One Transaction

Combining two split interest gift types into a single transaction isn’t easy. Charitable Solutions (CS) had a situation presented to us earlier this year, and through some creative thinking and careful risk management, we crafted a great gift solution for the donor. It took our CS team of Bryan, Gary, and Ryan to figure this out and wrap it up nicely, and frankly we’re a bit proud of the outcome.

The attorney for a donor called and asked about the possibility of using the donor’s residence to provide an income stream for the rest of her life and allow her to continue to live on the property. Like you, we heard “annuity” and “retained life estate” in this query.

The donor is 87 years old and the property is valued at close to $1 million in an affluent area of California.

A retained life estate request alone is straight-forward – a charity receives the deed to the property and agrees to allow the donor to live in it until their passing. On death, the property is sold to a new buyer, and the charity is the beneficiary of the proceeds. A gift of real estate to fund a gift annuity is theoretically straight-forward too.  The real estate is donated to a charity, the proceeds of sale are used to fund the annuity, and the residuum benefits the charity at the donor’s end of life.

Putting the two together - an RLE and annuity against the same piece of real estate however is complicated because there’s no cash flow in this arrangement to fund the annuity. No investment proceeds can be converted to cash to make the annuity payments or fund the annual expenses for managing the annuity.

Our team got it to work.  We’ll not get into the math and logic in detail, other than to provide a few data points:

  • The $1 million property was logically split into a $750,000 remainder interest in the gift and $250,000 as the value of the donor’s life interest.
  • The $750,000 remainder interest was used to “fund” the annuity.
  • The alignment of the donor’s age and the value of the annuity came together to suggest a favorable combination for the annuity calculation.
  • The donor will receive an annual payment of $65,000 and will be responsible for the expenses of the property until her passing, such as taxes, insurance, upkeep etc. (common in RLE arrangements).
  • The donor’s tax benefits on the RLE gift separate from the tax benefits from the annuity were a challenge but with the help of our tax experts and Crescendo’s tax calculator our team was able to give the donor’s professionals the proper guidance.

We should probably write a white paper on this gift, but we are opting to share this case with you now at a high level. It worked out nicely for the donor and for Charitable Solutions.  We’ve been careful about the risk to be comfortable with the likely 8-10 yr. lifespan of the arrangement. The donor has named five charities to be the beneficiaries of the final proceeds of the sale of the property.

Our reference work Charitable Gifts of Noncash Assets (2nd ed, October 2018) is a good companion for those curious about illiquid asset gifts. This situation of a charitable annuity on a real estate gift is one of twelve assets discussed and called out for planning purposes in a new appendix. Other sections have been updated, especially recent insights into virtual currency issues and opportunities. The book also offers a broad introduction to illiquid assets, terms and conditions to be part of one’s gift acceptance thinking, insights into donor conversations, as well as estate settlement issues.