A Guide for Gifts & Bequests for Loma Linda Contributors
- Real Estate as Charitable Gifts
- Outright Gifts of Real Estate
- Gifts of Real Estate: Using a Bequest
- Gifts of Real Estate: Using a Life Payment Testamentary Trust
- Gifts of Real Estate: Retaining Life Payments
- Gifts of Real Estate: Charitable Lead Trust
- The Right to Retain Tax Use of Real Estate
- "Bargain Sale" of Real Estate
The most suitable method of making a gift of property (residence, business property, farmland) to a Loma Linda Institution via the Loma Linda University Foundation depends on the donor's individual situation and on his/her personal goals. This section is provided because there is an increased interest in using real estate as a means of making gifts.
The methods of making real estate gifts as outlined in this section offer great flexibility in financial planning. As we have noted throughout this Guide, we always stand ready to provide advice and to answer questions. However, contributors should discuss their plans with their own tax and estate planning advisors, and with their legal counsels.
Outright Gifts of Real Estate
The outright gift of a parcel of appreciated land or other real estate is frequently the most advantageous method for contributors in high income tax brackets, and its benefits are immediately available to the benefitting Loma Linda institution.
Assuming the property has been held for a long term, the outright gift of property receives the following favorable tax treatment:
The opportunity to take an income tax charitable contribution deduction for 100 percent of the fair market value of the property as of the date it is transferred.
No capital gains taxation on past appreciation value.
Reduction of the contributor's taxable estate, by the value of the gift.
The actual income tax savings realized will depend on the donor's income tax bracket. Since the deduction comes "off the top," it removes the most heavily taxed income. In addition, the charitable deduction effectively reduces the net or out-of-pocket cost of making the gift.
As with other charitable gifts, the amount of the deduction that can be used in any one tax year is limited to a percentage (often 30 percent) of adjusted gross income for that tax year. However, the five-year carry-over rules apply.
EXAMPLE: An individual taxed at 31 percent may have been receiving a 3 percent annual return on land worth $100,000, or $3,000 per year in income. The tax savings realized from the $100,000 charitable deduction will be $31,000. This tax savings reduces the out-of-pocket cost of making the gift to only $69,000. In addition, the tax savings of $31,000 invested at 6 percent would yield an annual return of $1,860 to partially replace the income originally generated by the property.
Gifts of Real Estate: Using a Bequest
An outright gift of specific real estate to Loma Linda, through the individual contributor's will, establishes a 100 percent charitable deduction for estate tax purposes, with no limit on the amount.
Depending on the size of the taxable estate (total value minus final costs and any marital deduction), the tax savings from the charitable deduction reduces the gift's net cost and increases the total distributions for purposes desired by the contributor.
The larger the taxable estate, the greater the discount on the net cost of a gift by will. This is because federal estate tax rates, like the income tax, are progressive--they rise sharply as the size of the taxable estate increases (up to 55 percent of the excess over $3 million). Estate taxation is an increasingly important consideration.
Although a charitable gift by will provides no current income tax advantages, it can be the most acceptable method for some contributors. In many instances it can be accomplished by a simple codicil to an existing will.
If the eventual use of the fund created by a bequest of real estate is to be restricted to a specific purpose or program, the contributor or his/her counsel is urged to consult with a Loma Linda University Foundation or Advancement Office staff member to assure that the bequest wording is appropriate and that the fund or its income can be used effectively.
Gifts of Real Estate: Using a Life Payment Testamentary Trust
A contributor may combine the objectives of a gift by will and the benefits of a trust through the creation of a testamentary charitable remainder unitrust or a testamentary charitable remainder annuity trust. The trust comes into being following the contributor's death and makes payments for the lifetime of the surviving beneficiary(ies). Charitable remainder trusts (which are described at length in the charitable remainder section of this guide) can provide the following benefits for donors who create such trusts in their wills:
* Contributors retain management control of given real estate during their lifetimes.
* Surviving beneficiaries are relieved of the management responsibilities and problems involved in real estate ownership.
* Surviving beneficiaries receive a more diversified, productive source of income.
* Estate taxation and costs are minimized.
Eventually, a named memorial fund can be established by the benefitting Loma Linda institution to honor the contributor(s).
Great care must be taken in drafting the testamentary charitable remainder unitrust or annuity trust portion of a will. This is to ensure that the trust qualifies for the estate tax charitable deduction in all respects.
Gifts of Real Estate: Retaining Life Payments
Frequently an individual or couple wishes to make an outright gift of real estate but feels unable to give up the income produced by the potential gift property. With agricultural land, for example, the income may vary due to weather and markets. There is little opportunity to diversify risks, and the return can represent a relatively low percentage of the land's value--particularly when management fees and tenant shares reduce the owner's share. At the same time, such owners may hesitate to sell because the proceeds for reinvestment in other forms will be reduced by taxation of past appreciation in value.
These problems can be eliminated by making a gift of the real estate during one's lifetime to fund a trust which makes annual payments to one or more beneficiaries. At the death of the last beneficiary, the assets remaining in the trust are used for the charitable purpose chosen by the contributor. These are known as charitable remainder trusts--the charitable remainder unitrust and the charitable remainder annuity trust. These are discussed in the preceding section, and offer numerous advantages, including:
Increased annual income
Elimination of capital gains tax on the gift property
Substantial income tax charitable deductions
Reduced estate taxes
Transfer of assets to professional management without a fee
Once again, the creation of a lifetime payment interest for another person may result in a federal gift tax being paid by the grantor, although it generally may be eliminated through careful planning. If the second contributor (or eventual beneficiary) is a spouse, the gift tax marital deduction will eliminate any tax. If the grantor is the first payment recipient, the trust agreement can reserve the right, exercisable by a will, to revoke a surviving beneficiary's payment interest, making the gift incomplete and not subject to gift tax. This type of gift can be beneficial to the donor but should only be established with the guidance of an attorney or financial advisor.
Gifts of Real Estate: Charitable Lead Trust
The charitable lead trust (see the charitable lead trust section for details), like life payment trusts, is a split-interest trust, but the interests are reversed. Under this gift arrangement, Loma Linda University Foundation (and the specific benefitting entity such as the University, Medical Center, or Children's Hospital) receives income payments for a period of years specified by the grantor of the trust. At the termination of the trust, its assets pass to one or more individuals who have the remainder interest.
Among the several variations of charitable lead trust, one that my be useful in estate planning is the type under which the assets pass at a later date to other individuals instead of reverting to the grantor. This may be advantageous when the trust is funded with real estate likely to appreciate in value in future years, such as agricultural or residential property.
The Advantages of Charitable Lead Trusts Include:
Earnings from the assets in trust are removed from the grantor's taxable income. This reduces personal income taxes payable, although there is no charitable deduction as such. The trust is subject to income taxes, but it is allowed an unlimited charitable deduction for the payments made to the Loma Linda University Foundation.
For transfer tax purposes, the value of the future interest transferred to heirs is reduced by the present value placed on the Foundation's intervening income interest in the trust. Although a gift tax return must be filed and some tax may be payable when the trust is established, any gift tax paid is credited toward the eventual total unified gift and estate tax due.
The valuation of the gift is frozen at the lower level, regardless of future changes in the market value of the assets in trust for heirs. This permits rational planning for estate liquidity needs; it can also reduce total taxes payable and still provides heirs with the full benefit of any future appreciation.
A substantial gift in support of Loma Linda can be made during the term of the charitable lead trust, with the payments either designated as expendable when received or accumulated to create a named endowment fund. Establishment of such trusts should be done only after careful planning by skilled professional counsel. It is important to select a trustee who can reasonably be expected to carry out the grantor's wishes. The trustee also must evaluate all tax aspects of the plan. The Loma Linda University Foundation may serve as trustee.
The Right to Retain Tax Use of Real Estate
A special provision in federal tax law permits a contributor to give a personal residence or farm to entities such as Loma Linda and still retain the full use of the property as well as responsibility for maintenance, insurance and taxes.
The retained right of use of the real estate can be for the lifetimes of the contributor and a surviving beneficiary. The residence does not need to be the principal residence (it can be a second or vacation home), and the contributor does not need to reside on a farm that is given.
A substantial income tax deduction is allowed at the time of the irrevocable transfer of ownership of the property. The charitable deduction is less than the property's full market value, being reduced by the calculated dollar value of the retained life estate(s) as determined by government tables. However, the deduction is frequently as great as the contributor can use over the six tax years allowed for absorption of the deduction, and the tax savings can be spent or invested for additional future income.
For estate tax purposes, the value of the contributed real estate is 100 percent deductible in the estate of the grantor of a single life tenant or that of the survivor of a two-life tenancy. There also could be a partial deduction in the estate of the first beneficiary of a two-life tenancy. This deduction is based on the age of the surviving beneficiary.
"Bargain Sale" of Real Estate
The "bargain sale" gift of appreciated real estate has advantages if the property's current value exceeds the amount the contributor wishes to give. This is especially true if it is not practical to divide the value of the property between the gift to be made and the portion to be retained for personal use.
In a typical gift by this method, a parcel of land or a building is sold to the Foundation at a price significantly below its value but above its cost basis. The difference between market value and the selling price is considered a tax deductible gift for income tax purposes.
The seller/contributor is not taxed on the full appreciation of the property. Only the share of total gain which is allocated to the sale portion of the transaction is subject to income tax. The individual in the highest income tax bracket can, in some circumstances, invest the income tax savings and the sale proceeds for additional future income--and make a substantial charitable gift in the bargain. In addition, the contributor's taxable estate is reduced by the amount of the charitable gift portion, less tax savings retained.
Bargain sale gifts to Loma Linda should be discussed individually. Acceptance depends on the property's ready marketability, the margin between the appraised value and the selling price and availability of funds for the purchase.
NOTE: All gifts of real estate require an environmental evaluation to be performed on the property prior to the transfer. The donor must complete a questionnaire related to the potential or actual toxic and environmental risk involved with the property. A Foundation staff member can explain this procedure at the beginning of any real estate gift planning.
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