Twenty years ago, when I was wondering how the Vermont Land Trust would meet its next payroll, I started focusing on land gifts. It seemed a good way not only to conserve land, but to build our financial resources through the re-sale of land with an easement. Most of the gifts of land VLT has received in the interim have been outright donations, but some have been gifts of “remainder interests.” In these cases, the landowner donated the property but retained the right to use it for his or her lifetime. If the property involves a personal residence, farm or conservation property, the donor may claim a charitable deduction for the value of the remainder interest.
VLT has been the beneficiary of only 10 remainder interest gifts over the past 25 years, but collectively their financial impact on this organization has been extraordinary. Therefore, I was surprised when an experienced land trust attorney, who advises many conservation organizations in his state, told me that he had never worked on a remainder interest donation. That is probably because land trusts have not been promoting them. There are three reasons why you may want to focus on this type of gift, especially at this time:
Those 10 gifts represent a small percentage of VLT’s planned gifts, but they have contributed enormously to our ability to build a solid financial base. Even after a conservation easement was placed on the land, each gift brought (or will bring) net sale proceeds, after all acquisition, holding and disposition expenses were covered, of between $100,000 to over $1 million, and Vermont is not known for high land values. Those funds contributed directly to the growth of VLT’s stewardship endowment, operating endowment, revolving land acquisition fund, enforcement fund and operating reserve, as well as to the CEO sleeping a little more soundly at night.
Enhanced Tax deductions
While everybody has been celebrating Congress’ renewal of the enhanced tax deductions for donations of conservation easements made in 2010 and 2011, few have recognized that these same deductions apply to remainder interests as well. (Russ Shay, public policy director for the Land Trust Alliance, advises that the enhanced tax benefits also apply to donations of fee interests where the mineral estate is withheld, but we don’t see many of those in Vermont.) Instead of the deduction being limited to 30% of adjusted gross income (AGI) with a 5-year carryover, the donor of a qualifying remainder interest may deduct up to 50% of AGI and have a 15-year carryover. For a retired person with modest taxable income but valuable real estate to donate, this is an enormous benefit.
Historically Low Discount Rates
There is another unexpected factor in the equation. In the late 1980s, when I first started looking at the tax benefits associated with remainder interest gifts, the federal discount rates used to calculate the charitable deduction were around 10%. A single donor had to be 80 years old before the charitable deduction for a remainder interest equaled 50% of the donated property’s value. So imagine my astonishment when in December I ran the numbers for a single donor age 66 and discovered that she would be able to deduct almost 75% of the appraised value of her property. The December 2010 discount rate was at an historic low (1.8%), but even using the January 2011 rate of 2.4%, she will still be able to deduct two-thirds of the property’s value. The combination of the enhanced tax benefits and low interest rates makes a remainder interest gift an extremely attractive planned giving vehicle, especially for people who have already decided to leave their land to your land trust.
What should you look out for?
Remainder interests are not without their risks, so both donors and land trusts must go into them with their eyes open. For donors, the gift is irrevocable, and they will no longer have access to the capital value of the property. In addition, they will be responsible for maintaining the property, paying the taxes and keeping the premises insured during the period of their life interest. On the other hand, there are income tax advantages and, for some, estate tax advantages as well. Remainder interests also avoid the delay and expense of probate, because ownership passes automatically as soon as the life interests terminate or are released.
VLT routinely asks remainder interest donors to sign a release of their life interest at place the document in escrow. The instructions to the escrow agent are to deliver the release to VLT, if the donor’s physician determines that due to physical or mental incapacity, the donor is unlikely to ever be able to use and enjoy the property again. This allows the life tenants to be relieved of the burden of carrying the property, while allowing the land trust to begin the process of selling it. The release may be accompanied with a second charitable deduction.
For the land trust, there are the usual hazards and risks associated with any acquisition of real estate. You must do a thorough hazardous waste assessment, obtain clear title, and take the other steps required
to complete your due diligence. The land trust must also be prepared to cover the taxes, insurance and normal maintenance for a period of time, perhaps for several years after you acquire it, until the property is sold. In some cases, it may also need to pay for certain improvements, such as the removal of asbestos or lead paint, to make the property more attractive for resale.
The very best candidates for remainder interest gifts are people who have already advised you that they are leaving their house or land to your organization at their death. Gifting a remainder interest now means the bequest is being made “with warm be considering the possibility, but have not acted on it yet.
But don’t overlook the rest of your membership. Some members may have already included your organization in their wills, but have not told you. Others may be considering the possibility, but have not acted on it yet.The unique confluence of enhanced tax benefits and low discount rates makes 2011 the ideal time for donors to consider a remainder interest gift.