Estate Planner Jan-Feb 2001
You can gain many income, estate and gift tax advantages when you give to charity by establishing and using a split-interest trust — such as a charitable lead trust or a charitable remainder trust. But establishing these trusts can be time consuming and costly. An alternative is to give a partial property interest directly to charity.
Three simpler-to-administer ways to do this are to give remainder interests, give fractional interests or grant a conservation easement on your property.
These allow you to receive many of the same benefits as you would by establishing trusts:
- A charitable contribution income tax deduction for the interest passing to charity, valued as of the date of the gift,
- A charitable gift tax deduction,
- An exclusion of the property from your estate for estate tax purposes, and
- Additional deductions if you substantially improve the property.
Let’s examine how each method works.
1. Giving a Remainder Interest
A gift of a remainder interest involves dividing the ownership of an asset between a current ownership interest and a later ownership interest. You keep the current ownership interest and give away the later or remainder interest.
Your personal residence, vacation home or farm are examples of good candidates for giving a remainder interest to charity. You may split the remainder interest among multiple charities or a mix of charities and individuals. By giving a remainder interest, you can choose to have your property pass directly to the charity or first to someone else and then to the charity, either at your death or at a fixed time.
You may restrict the charity’s use of the property. For example, you can require the charity to sell the property, or give the charity the right to keep it. You may require the charity to pass the title to another charity. You may provide that the charity will lose the property if it attempts to sell or place a mortgage on it, allow others to use it for reasons other than its intended use, or alter it. For example, you may use this type of restriction when your gift is a residence with historic or architectural significance.
2. Giving a Fractional Interest
A gift of a fractional interest involves dividing the ownership of an asset into fractions. For example, you keep 2/3 of an asset and give the other 1/3 to charity. A vacation home or items on tangible personal property that have a significant value are assets to consider for a fractional interest gift. (See “Donate Artwork Using Fractional Interests.”) If you and the charity later sell or replace the property with another type of property, the charity will be entitled to share in the proceeds of the new property.
Your gift must be a portion of your entire ownership in the property. For example, if you have a right to use a vacation residence during your lifetime, you could donate one-third of your interest in the use of the property for your life to charity. If you owned the property outright, you would not be able to donate just the use of the property to charity for your lifetime.
3. Granting a Conservation Easement
A conservation easement is a permanent restriction on the use of your property that furthers the objectives of a tax-exempt organization whose goals generally relate to the environment or the presentation of history.
For example, you could place a restriction on the development of vacant land. You must grant the easement to a qualified organization that would be able to enforce it, such as a charity or government organization. The value of the easement for determining your charitable deduction is the difference between the value of the property before and after you grant it.
Which Method Is Best for You?
If you wish to benefit from the income, estate and gift tax advantages of making a gift to charity using a split interest but want to avoid the expense and complications of a charitable lead trust or a charitable remainder trust, consider making a partial gift. If you would like assistance in determining whether one of these charitable gifting methods is best for you, please give us a call.
Donate Artwork Using Fractional Interests
If you wish to give a work of art you own to a museum, you may use fractional interests. Suppose you give a one-third interest in a painting to charity. The charity will then have the unrestricted right to use the painting for four months of the year. The charity is not required to take possession of the painting; it simply must have the right to do so. The right of the charity to possess the painting must take place within one year of the date of the gift.