Our partial gift focus herein, which tends to be relatively simple, involves transferring an interest in a residence to a qualified charity after you pass, or after a term-of-years.
Assuming a couple, the retained interest could reflect both lives. Multiple lives in the actuarial calculations, of course, reduce the up-front charitable deduction measured by the valuation of the remainder (Sec. 170(f)(3)(B)(i), Regs. 1.170A-7(b)(3)).
The measure of the deduction is affected by the monthly IRS rate under Section 7520. As we write in mid-year, this rate has increased in the recent months of 2022. The increased Section 7520 rate has reduced the charitable donation deduction, albeit it is still in the very worthwhile category (See “Section 7520 Interest Rates,” IRS.gov).
This type of gift will also entail attorney involvement, but the agreement will likely be a one-time proposition – no annual return, etc. Our topic also doesn’t involve a separate trust, naming trustees and annual income tax returns.
Key Points
Particularly important aspects of our topic include the following:
- The transfer is not in trust, though the transfer involves less than the donor’s entire interest.
- There is an intentional contribution of the partial (the down-the-road) remainder interest.
- The residence can be a cooperative apartment if used as the donor’s principal residence.
The fair market value measure of the deduction turns on one’s age, or the term of years (Sec. 170(f)(4), Regs. 1.170A-7(c’), Regs. 1.170A-12). The older person donating a remainder interest achieves a greater deduction than the a younger donor.
Less Common Scenarios
The typical arrangement is remainder to charity following the death of the surviving spouse. It is also possible to make the gift effective at an even later date; e.g., not until the death of the couple and one or more children or all the children.
The charitable deduction in such a case is smaller. Such an arrangement is rare, and the practicalities are more difficult considering the very extended delay in transfer to charity. But less-than-typical arrangements are possible.
Most gifts of this nature donate the entire remainder interest to charity. However, a worthwhile planning possibility is to split the remainder between family and charity. See, e.g., an IRS ruling where there was a 10 percent remainder interest to a public charity as one of the tenants-in-common (Rev. Rul. 87-37, 1987-1 C.B. 295, Sec. 170(f)(3)(B)(ii)).
It is possible that significant improvements to a residence after the gift give rise to an additional charitable contribution at such time (PLR 8529014, 4/16/85, concluded that installation of new heating and air system did not result in tangible personal property).
Circumstances involving severe illness may justify an increased income tax deduction; i.e., disregard of the actuarial assumption of life expectancy. The tax rules not only contemplate this possible scenario but give details re when this rule may apply:
“The mortality component prescribed under section 7520 may not be used to determine the present value of an annuity, income interest, remainder interest, or reversionary interest if an individual who is a measuring life is terminally ill at the time of the transaction. For purposes of this paragraph (b)(3), an individual who is known to have an incurable illness or other deteriorating physical condition is considered terminally ill if there is at least a 50 percent probability that the individual will die within 1 year.
However, if the individual survives for eighteen months or longer after the date of the transaction, that individual shall be presumed to have not been terminally ill at the time of the transaction unless the contrary is established by clear and convincing evidence.” (Regs. 1.7520-3(b)(3); see “Example 2 Terminal Illness,” see also Regs. 25.7520-3(b)(3) re gift tax).
Concluding Perspective
Keep in mind the interplay with other planning considerations, including substantiation rules governing valuation of the residence.
Many consider itemizing in alternate years and concentrating itemized deductions in a particular year. Plan your other itemized deductions, including other charitable donations, considering this atypical charitable deduction. Charitable contribution limitations and contribution carryovers may affect the computations.
One may also need to look at the property tax rules affecting the transfer. The property tax valuation may not immediately go down despite the (partial) introduction of a charity.
One possible planning opportunity, assuming a sufficiency of other assets, would be to donate a remainder interest in the residence currently and then also donate the income tax savings from the charitable donation. This might be considered a double “prepayment” assuming the residence would in any event go to one’s favorite charity at death.
