A gift of residual interest gives back in a different way. You may, for instance, donate your residence but retain the right to use it while you live. You may give a valuable piece of art, but continue to enjoy it in your lifetime. In each case you receive a donation receipt for the present value of the residual interest you have given to the Foundation.
A gift of a residual interest allows the donor to make a gift of real estate, get a donation receipt, and retain the use of that property during his lifetime. That is, you may donate your residence but continue to live there. You receive a donation receipt for the present value of the “residual interest” you give — irrevocably — to the Foundation. However, you remain responsible for maintaining the property that ultimately will go to the Foundation.
There are many benefits to the donor and the Foundation under this arrangement. The tax benefits include a donation receipt for the present value of the “residual interest” — the value, in today’s dollars, of the property the Foundation will eventually receive. This is based on the market value of the property, current interest rates, and the life expectancy of those retaining a life interest in the property.
If you decide to contribute your personal residence, you will not be taxed on the gain in its value since you purchased it. If it becomes necessary for you to give up the house during your lifetime, you will have several options: You can rent the house and retain the rental income; give your life interest to the Foundation and receive an additional donation receipt; or agree with the Foundation to sell the house and receive a share of the proceeds based on the value of your life interest.
Giving your principal residence
Eleanor G., age 72, owns a home valued at $200,000. She wants to continue living in it for many years to come, but she would like the Foundation to have it at the end of her life. She decides to give the home to the Foundation now, retaining a life interest for herself. She receives a donation receipt for $85,421 which, assuming a 48-percent combined tax credit, will reduce her income taxes by $41,002 over the next five years. (The portion of the donation receipt that she may claim in any given year is limited to 75 percent of her income, but she has the gift year and five additional years to use the full amount.)
Because Eleanor’s house is her principal residence, she realizes no taxable gain at the time of the transfer, no matter how much its value has increased since she acquired it. During her continued occupancy, she will be responsible for maintenance and such other expenses as are specified in her gift agreement with the Foundation. If it becomes necessary for her to give up the house sometime before her death, she has several options. She may rent the house and retain the rental income, give her life interest to the Foundation and receive an additional donation receipt, or, by agreement with the Foundation, sell the house and receive a share of the proceeds based on the value of her life interest.
Giving other types of real estate
It’s easy to see how a residual interest in a personal residence can be an appropriate gift, but in fact, other property you own and use may also be a likely candidate. In this case, you will be taxed on 50 percent of the capital gain attributable to the residual interest, but the tax savings from the donation receipt will always more than offset the tax on the gain.
Henry C., age 73, has a cottage on a lake a few hours from his home in Kingston. He bought the cottage many years ago for $40,000, and it is now worth $100,000. He’s reluctant to sell it, both because he still uses it frequently and because the sale would result in a taxable gain of $30,000 (50 percent of $60,000). By transferring it to the Foundation with a retained life interest, only 50 percent of the gain attributable to the residual interest will be taxed. In Mr. C’s case, the $53,608 donation receipt he receives for the overall value of the residual interest will more than offset the taxable gain of $16,082.
When you give property that is not a principle residence and has appreciated in value, the amount of the donation receipt creditable in any one year is 100 percent of the taxable gain in the gift, plus 75 percent of your other income. This assures that you will always realize net tax savings, no matter how much the property has appreciated.
Note: With real estate held solely for investment purposes, it generally makes more sense to contribute the residual interest by means of a charitable remainder trust.
Giving your personal residence
You love the old house, but it’s simply too big for your present needs. If you move to smaller quarters and donate the house to fund your trust, you will recognize no capital gain whatever, no matter how much it has appreciated in value. The trustee will sell the house and invest the full proceeds to earn new income for you, and at your death or the expiration of your trust, the Foundation will receive a significant and very welcome gift.