How to Have Your Cake and Eat It Too

iStock_000017590293XSmallIf you end up in life with assets that you would like to use or from which you need to receive income, yet also want to donate to charity, there may be ways for you to do both. With the help of an estate planning lawyer and your accountant you might be able to use one of these “have your cake and eat it too” ideas.

Get Income for Life From An Asset You Give Away.

Use a Charitable Remainder Trust to give assets to a qualified charity, get the income tax deduction, avoid estate taxes, avoid capital gains taxes, and still get the good feeling from giving AND get an income for life or a certain number of years.

Be prepared to pay for lawyers fees to review the trust as well as accountant fees to make sure you satisfy the IRS! Be ready to have your asset sold by the charity so that it can be used to pay you the income as well as to fund their charitable endeavors.

John and Mary Jones, both in their early 80’s, have owned a vacation condo for a number of years. It brings in about $4000 a year from nightly rentals. They want to be done with it, their heirs are not interested in it, but John and Mary would like some value for it. They arrange for a charitable remainder trust to be created, put the condo in it and the charity sells the condo. The Smiths then decide to take 4% per year from the calculated (every year) value of assets in the trust. After they die, the remainder in the trust goes to the charity selected.

Keep Your Asset, But Still Get An Estate and Gift Tax Break On it.

A Charitable Lead Trust lets you give away the income from your assets for a certain number of years but keep the principal and pass it to your heirs without any (or with at least reduced) estate or gift taxes.

Bank Rate claims:

“Estate planners recommend this track for people with substantial wealth to stash assets whose value will undoubtedly appreciate in the future.”

According to the New York Times, Jackie Onassis put the bulk of her estate in a charitable lead trust that paid out for 24 years, following which, anything left would go to her grandchildren.

If you give annually, have a million or so laying around, and if interest rates are low and you don’t mind complex vehicles, you might look into these.

That same Times article explains it this way:

“Michael O. Hartz, a partner at the law firm Katten Muchin Rosenmann in Chicago, calls this approach “heads I win, tails I don’t lose.” Mr. Hartz calculated that if you put $2 million into a 20-year charitable lead trust assuming the 2.2 percent I.R.S. return rate, it would have to pay out about $125,000 a year to be worth zero at the end. But if the trust earned a steady 7 percent each year, there would be $2.62 million left tax-free to heirs.”

There are risks with this type of setup. You specify how much the charity will get each year. If your assets lose value or earn less, the principal will decline. If the principal declines to lower than the total amount promised over the years to the charity, they will get the entire amount. There may not be any residual value left for your heirs. You also lose access to the asset, it is tied up for the duration.

Give Away Your Home, But Continue To Live In It.

You can give your house away to a charity, but retain the ability to live in it. You will get the income tax deduction for the gift to charity (spread out over several years), avoid the capital gains tax on a sale, feel good about benefiting your charity and still have a place to live. You do still have to maintain the home, pay the taxes, keep up the insurance and etc however.

A financial planner Gary Schatsky is quoted in this New York Times article saying:

The life estate is a beautiful opportunity in the law that allows you to have your cake and eat it, too,” Mr. Schatsky said. He explained that with such a conveyance, the donors transfer title to the property to the charity of their choice while retaining the right to live in the house for a specified period of time or even for the rest of their lives.

The Northwest Indiana Times article Donating your home to charity has its own set of benefits gives the following example:

“Consider, for instance, an older homeowner who would like to remain in his home but would like to donate to his alma mater. He can create a “retained life estate,” notes Caroline Camougis, managing director at Delphi Partners, a New York City consulting firm. That allows him to give the home now, but continue to live in it, as well as enjoy a charitable tax deduction for a portion of the property’s value, avoid some capital gains taxes and remove the property from the donor’s taxable estate, she explains.”

Up until now, we haven’t considered using these types of trusts in our estate planning, but since we may be selling our vacation condo in the next couple of years, I think I will check it out with my attorney/accountant.

Disclaimer: I am not an estate planner, a lawyer or an accountant. If these ideas sound interesting, consult with yours as they are complex legal entities needing professional attention.


How to Have Your Cake and Eat It Too — 8 Comments

  1. I cannot freakin’ believe it! Give away our home in live in it? This is really something. Thank you for sharing, Marie, because now I know about these interesting items and it makes me question more in general and think more consistently outside the box.

  2. That sounds like a nice idea, for the person to be able to stay in the home until they pass, and at the same time know they are doing a good deed with it. It also prevents resentment from the rest of the family since you do it while you are still healthy and with your right mind, they can’t challenge the decision of the will.

  3. I agree, it’s important to have just a few regrets and to consider those as lessons in life we can learn from. It’s not very easy to have a regret free life, but if spend at least several minutes about it and learn something from the experience, then we will eventually avoid doing things we will later regret.

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