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Your Home Can Provide Versatile Gift Options: Low Interest Rates Increase Your Benefits

The currently prevailing historically low interest rates directly affect the discount rate the IRS uses to value so-called split-interest charitable gifts (e.g., charitable remainder trusts and gift annuities). Generally speaking, the lower the interest rate, the lower the value of the charitable deduction.

A major exception to this rule in which a lower IRS discount rate produces a higher charitable deduction is for a gift of a remainder interest in a personal residence or farm. Under this arrangement, the donor makes a gift of a residence or farm and retains the right to occupy the property for life or until such time the donor decides that he or she wishes to move for whatever reason.

Result: A substantial tax deduction and tax saving that frees up tax dollars into spendable income without causing any disruption in the donor’s lifestyle. In addition the donor will escape capital-gain tax consequences, if any.

Moreover, the term personal residence is broadly defined in the tax regulations to include any property used by the owner as a personal residence (e.g., a condominium, a vacation home, and even a boat).

Example: Alice, who is 70, has lived in her home for almost 30 years and has no current plans to move. She and her deceased husband paid $80,000 for their home, which is currently valued at $500,000. In discussions about her estate plan with her attorney, she mentions that she would like to bequeath the home to us, a favorite of hers and her husband’s.

The lawyer suggests that she consider giving a gift of a remainder interest in her home to us now and retain the right to continue to live in it. If she decides to do so, the lawyer says that she will be entitled to an income-tax deduction of $314,410 using the March 2009 discount rate of 2.4%. If Alice is able to use the entire deduction—she has six years—she will be able to save up to $110,044 in income tax in her 35% bracket.

Note: In 2007 when the discount rate was as high as 6.2%, Alice’s deduction could have been $212,078 and her tax savings $74,227.

If the time comes when Alice feels the need to relocate, the following options would be available to her: make another gift—a gift of her life estate (her right to live in her home) to us; or we could jointly sell the home and share the proceeds, based on the value of our respective interests at the time.

Please let us know if such an arrangement would be of interest to you.