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Community Foundation of the Ozarks  Wednesday, November 29

Community Foundation of the Ozarks  Wednesday, November 29. Why Do Life Estate Gifts Have Great Potential?. Douglas R. Nickell 417.886.5912 dnickell@lathropgage.com. May be largest assets in individual donor’s portfolio. May be only asset available to fund a charitable gift.

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Community Foundation of the Ozarks  Wednesday, November 29

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  1. Community Foundation of the Ozarks Wednesday, November 29 Why Do Life Estate GiftsHave Great Potential? Douglas R. Nickell 417.886.5912 dnickell@lathropgage.com

  2. May be largest assets in individual donor’s portfolio May be only asset availableto fund a charitable gift.

  3. Different kinds of real estate may be the subject of gifts • Land – developed or undeveloped, farm property • Rental property • Personal residence • Apartments • Motels/hotels • Business/commercial property • Vacation homes/condo

  4. Different Methods of Making Real Estate Gifts

  5. Outright Immediate use or sale with sale proceeds used by charity

  6. Bargain Sale Sale to charity for less than full FMV with payments over time

  7. Charitable Remainder Trust Provides variable income based on percentage of annual value of trust assets For donor’s lifetime or up to 20-year term

  8. Gift Annuity Fixed payments for life of one or two individuals Amount of payment based on age of income beneficiary at time of gift

  9. Life Estate AgreementFocus of Our Discussion Today • Gift of remainder interest in • Residence • Vacation home • Farm • Life estate agreement • Ideal planning vehicle for • Individuals who desire to make a testamentary gift of real estate to charity • While continuing to enjoy use of the property for life and enjoying a current and potentially substantial charitable income tax deduction

  10. How a Life Estate Works • Deed remainder interest in property to charity now • Retain a life estate in the property • Donor pays maintenance, taxes and other current costs of ownership • Donor gets an income tax deduction now for current value of remainder interest • Charity receives proceeds from sale of property upon death of the donor

  11. Life Estate Agreements are Limited • Gift of a remainder interest in a personal residence • Farm property • Vacation home is OK

  12. Gifts of RemainderInterest Can Be Measured • Life of one or more individuals • A fixed term of years • A combination of the two • Most common to operate for the life or lives of the residents of the contributed property

  13. Charitable Deduction Equals • Net present value of the charitable remainder interest based on • FMV of the property on date of transfer as established by independent appraisal • FMV of depreciable improvements • Estimated useful life of the improvements • Salvage value of the improvements • Measuring term of the agreement • Applicable Federal Midterm Rate in effect for the period of transfer

  14. Sample PresentValue Computation

  15. Single life • Mrs. Donor, age 70 • Transfer remainder interest on 11/1/06 • FMV = $250,000 • Measured by Mrs. Donor’s life • Depreciable portion = $125,000 • Estimated useful life of 45 years • Salvage value of depreciable portion = $12,500 • Applicable Federal Midterm Rate for 11/06 is 5.60% • Charitable Deduction for Remainder Interest — $111,593.25

  16. Two lives • Mr. and Mrs. Donor, age 75 and 70 • Transfer remainder interest on 11/1/06 • FMV = $250,000 • Measured by longest life expectancy • Depreciable portion = $125,000 • Estimated useful life of 45 years • Salvage value of depreciable portion = $12,500 • Applicable Federal Midterm Rate for 11/06 is 5.60% • Charitable Deduction for Remainder Interest — $91,224.38

  17. Term of Years • Mrs. Donor, age 70 • Term of twenty years • Transfer remainder interest on 11/1/06 • FMV = $250,000 • Depreciable portion = $125,000 • Estimated useful life of 45 years • Salvage value of depreciable portion = $12,500 • Applicable Federal Midterm Rate for 11/06 is 5.60% • Charitable Deduction for Remainder Interest — $ 67,259.20

  18. Donor Must File Gift Tax Return Even if no tax is due

  19. Benefits to Donor • Charitable income tax deduction for net present value of the charitable remainder interest • Flexibility • Transfer avoids probate at death • Removal of property from estate for estate tax • Recognition by charity currently for contribution

  20. Benefits to Charity • Irrevocable transfer • Chance to recognize donors now • Flexibility it offers to donors

  21. OCREF • Ozarks Charitable Real Estate Foundation • Supporting organization owned by CFO • Designed to hold real estate gifts • 7 managers with experience in real estate adopted formal acceptance guidelines

  22. Requirements • Irrevocable transfer • Written Life Estate Agreement • Qualified appraisal • Title insurance commitment • Title insurance policy • Property inspection and analysis • Environmental assessment

  23. Questions? ? ? ? ? ? ?

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