Gifts of Land with Reserved Life Estates
Landowners may donate land to Placer Land Trust, but reserve for themselves and sometimes others the right to use and enjoy the property during their lifetimes.
This is known as a gift of a remainder interest. Gifts of remainder interests are usually made by landowners in their mid-70s or older, who have decided irrevocably that they want to leave the property to Placer Land Trust. In this way donors can take advantage of certain tax benefits and support Placer Land Trust in the long run, while they continue to enjoy their property and know that PLT will protect land's the conservation values after they are gone.
How does a gift of a remainder interest work?
The donor executes a standard deed conveying the property to Placer Land Trust, but reserving a "life estate" for themselves or others. The deed requires that during the period of the life interests, the holders must pay the property taxes, keep the premises insured, and generally maintain the land and buildings in good condition. If the property has conservation values, the deed may also prohibit any uses that would diminish or damage those values. Except for ensuring that its remainder interest is protected, Placer Land Trust has no right to use the property while any of the life tenants are alive.
Life interests can run simultaneously or consecutively. A husband and wife may share a life interest, so long as either is alive. A child may have a life interest after their parents are deceased. Life interests can apply to only part of the property.
At the conclusion of the life interests, the property passes automatically to Placer Land Trust. Unlike a donation by bequest, Placer Land Trust is spared the delay of the probate process. The property is also exempt from the claims of the estate's creditors.
Is the Gift of a Remainder Interest Tax-Deductible?
The donor can claim an income tax deduction for a gift of remainder interest when the property is:
- a personal residence, including a second home;
- a farm; or
- a property that meets the IRS test for deductibility as having significant conservation, public recreation or historic value.
Placer Land Trust can make a preliminary assessment of deductibility, but donors should always seek the advice of competent legal counsel before making the gift.
If the Gift is Tax-Deductible, how is the Deduction Calculated?
Since the donor keeps certain life interests in the property, the charitable deduction is limited to the present value of the remainder interest. That value is determined from actuarial tables published by the IRS. It depends primarily upon the number of people who hold life interests and their ages.
For example, if the life tenant is age 90, the remainder interest is 72% of the value of the property. The figure drops to 48% if the life tenant is age 75, 26% at age 60 and just 7% at age 35. Obviously, the IRS regulations favor older donors. If there are two or more life tenants, the percentages are even lower.
One way to increase the deduction is to have the donor first convey a conservation easement on the land to Placer Land Trust (assuming donated property has conservation value), and then gift the remainder interest.
Suppose, for example, a husband and wife, ages 75 and 70, own a house and 100 acres of land with a fair market value of $200,000. If they donated just a remainder interest, their total deduction would be 31% of the property value, or $62,000. On the other hand, if they first placed a conservation easement on the property which lowered its fair market value to $125,000, and then donated the remainder interest, their total deduction would be $113,750:
- $75,000 -- Value of the Conservation Easement
- $38,750 -- 31% of $125,000 restricted value.
Like all charitable contributions, the tax deduction for gifts involving appreciated property is limited to 30% of the donor's adjusted gross income. However, any unused portion can be carried over for up to five additional years.
What are the Estate Tax Implications of a Remainder Interest Gift?
Where the donor is the only life tenant or the donors/life tenants are husband and wife, a gift of a remainder interest completely removes the property from their taxable estate. On the other hand, if the donor names a child or some other person as a life tenant, that may create a taxable gift and a portion of the property's value may be included in the donor's taxable estate. Placer Land Trust can often make a preliminary evaluation of the estate tax consequences of such a gift, but in the final analysis donors should rely upon their own legal and financial advisors.
What will Placer Land Trust do with the Property after it has full title?
In most cases, the donor and Placer Land Trust have discussed and agreed upon what the ultimate disposition of the property will be before the donor makes a gift of a remainder interest. Where the land has conservation values, Placer Land Trust retains a permanent conservation easement to protect those values. In cases where the land does not have conservation value, under the conditions agreed upon with the donor, PLT will sell the property, and the proceeds used to build Placer Land Trust's financial reserves or to protect other land. If public ownership of the property is appropriate, Placer Land Trust may convey the property to a public entity with appropriate restrictions on its future use.
Occasionally, a donor will not indicate what uses should be allowed. In those cases, Placer Land Trust would analyze the property to determine what natural resource values should be protected, and then restrict the land before the property is reconveyed.