Gifts of Remainder Interests in Homes and Farms

Remainder Interests
in Homes
and
Farms

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taken from this
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explanations of
all concepts.
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A partial interest
gift with
retained
interests occurs
when a donor
gives some
rights to
property but
keeps others

Normally, donor
can’t keep some
rights and
deduct a partial
interest
gift

But, you can deduct
a remainder interest
in a home or farm
Other Exceptions
• Giving all or an
“undivided portion” of
a property interest
• Charitable remainder/
lead trust or pooled
income fund
• Qualified conservation
easement

A remainder
interest gives the
right to own the
property after a
set time or after
the death of a
person

Unlike a will, a remainder interest is
not revocable, and can even be sold
Remainder
Interest

A deductible
remainder
interest in
farmland or a
personal
residence must be transferred by deed,
not by trust or contract

A farm is any land and improvements used
(even by a tenant) to raise crops or livestock

A remainder interest in any
part of a farm may be gifted
(Rev. Rul. 78-303)

Can I give a remainder interest
of an undivided share in
farmland?
12.5%
25%

Yes, donor may deduct a
remainder interest shared by
charity and others as tenants in
common (Rev. Rule 87-37)
12.5%
25%

However, IRS may deduct cost
of partitioning (of forcing a sale
or division)
12.5%
25%

• No deduction for
remainder just in
mineral rights
because it is not a
“farm” Reg. 1.170A-7(b)(4)
• Can gift remainder in
entire “fee simple”
farm (even if land
and mineral rights go
to separate charities)PLR 8316037
• Can gift remainder in
farm without mineral
rights if you don’t
owned them
Mineral
Rights

How do you calculate the deduction for a
remainder interest in farmland?
1. Find the §7520 interest rate
www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-7520-Interest-Rates
2. Multiply value of land
by remainder
percentage for that
interest rate (from IRS Pub.
1457 for one or two lives or specific
term)
www.irs.gov/Retirement-Plans/Actuarial-Tables

Ex: A remainder interest in $100,000 of farmland
given by a 59 year old donor on 10/1/13
Choose the
interest rate
from the
current or the
previous two
months

Charitable deduction for
remainder interest deed in
$1,000,000 of farmland by age 59
donor
1.0% (Jan 13)
$804,790
11.6% (May 89)
$156,840

Choosing the
lowest rate
creates the
highest
deduction, so
here we select
2.0%

2. Multiply value of land by remainder
percentage for that interest rate
www.irs.gov/Retirement-Plans/Actuarial-Tables
Because here
the remainder
goes to charity
after a single
life, download
Table S. For two
lives use table
R(2) instead

Table S - Based on Life Table 2000CM
Interest at 2.0 Percent
Life Life
Age Annuity Estate Remainder Age Annuity Estate Remainder
0 38.3436 0.76687 0.23313 55 19.1825 0.38365 0.61635
1 38.3807 0.76761 0.23239 56 18.6933 0.37387 0.62613
2 38.1678 0.76336 0.23664 57 18.2034 0.36407 0.63593
3 37.9440 0.75888 0.24112 58 17.7136 0.35427 0.64573
4 37.7125 0.75425 0.24575 59 17.2236 0.34447 0.65553
Scroll down to
the part of the
table for the
selected §7520
rate (2.0%)
Find the
remainder
percentage for
the age of the
donor (59)

Remainder %
X Farmland value
Deduction
.65553
X $100,000
$65,553

Leaving land to
charity
by will
•Revocable
•$0 tax deduction
•Impacts charity after
death
Leaving land to
charity
by remainder deed
•Irrevocable
•$65,553 immediate
income tax deduction
•Impacts charity after
death or immediately
if charity sells
remainder interest
•Immediately increases
cash assets available
for income producing
investments

Because farmland can be gifted
in parts, a donor could annually
give remainder interest shares
up to income limits or desired
marginal tax rate
•Allows for increasing
valuation each year
•Avoids risk of losing carryover
deduction at death
•Could use value of annual deductions to pay
for ILIT life insurance passing tax free to heirs

Donor can use
money from
remainder gift
tax deduction to
buy tax free life
insurance (ILIT)
for children’s
inheritance
[aka “wealth
replacement trust”]

remainder interest in
farmland given to charity
$65,553 deduction x (39.6%
fed + 5% state) = $29,236
$29,236 buys est. $70,000
paid up ILIT life insurance
children
receive
$70,000
(tax free from
ILIT)
will divides farmland 10%
to charity 90% to children
charity
receives
$12,500
(10% x $125,000)
children
receive
$67,500
(90% x 125,000 =
112,500, less 40%
for estate taxes)
charity
receives
$125,000
farmland
farmland worth $125,000 at death
Age 59 wealthy donor with $100,000 farmland

Gifts of remainder interests in the
donor’s personal residences can also
be deducted
Remainder
Interest

Includes second homes,
vacation homes, even a boat
with bathroom, cooking, and
sleeping facilities, if used by
the donor as a residence

Deduction for a remainder
interest in a house is less than for
land because houses wear out

59 year old donor giving on 10/1/13
Remainder interest in
$100,000 farm
.65553 x $100,000
$65,553 Deduction
.29603 is the
Depreciation
Reduction
Factor
Remainder interest in
$100,000 home
.65553 x $20,000 (land)
.65553 x $10,000 (salvage)
(.65553-.29603)x $70,000
$44,831 Deduction

Depreciation reduction factor
R factor age – R factor age after useful life of house
D factor age X Useful life of house*
Table C at www.irs.gov/pub/irs-tege/table_c_2009.xls
See IRS Pub. 1459 http://www.irs.gov/pub/irs-pdf/p1459.pdf
Ex: 59 year old donor giving on 10/1/13
R factor@59 – R factor@104
D factor@59 X 45
Table C(2.0)
Factors for Reducing Assurances -
Based on Table 2000CM
Interest at 2.0 Percent
Age R-Factors D-Factors
x Rx-0.5Mx Dx
59 366311.5 27494.35
… … …
104 51.23390 31.62524
366311.5–51.23390
27494.35 X 45
=.29603
*An appraiser can estimate the useful life of a house. IRS examples use 45 years.

Underlying formula gives same result
i.e., it equals remainder factor – depreciation reduction factor
n = the building’s estimated useful life, e.g. 45
i = the 7520 interest rate, e.g. 0.02
v = 1/(1+ the 7520 interest rate), e.g. 1/1.02
x = the age of the life tenant, e.g., 59
lx = expected number of persons living at age x out of 100,000 births as set forth in Table
2000CM (available for download at http://www.irs.gov/Retirement-Plans/Actuarial-Tables)
Present value of
the future
amount in the
middle of each
year
% chance of donor
death in each year of
building’s remaining life
% of value
remaining in
the middle
of each year

Formula required to calculate factor
for the depreciable part for two lives
n = the building’s estimated useful life, e.g. 45
i = the 7520 interest rate, e.g. 0.02
V = 1/(1+ the 7520 interest rate), e.g. 1/1.02
x & y = the ages of the life tenants, e.g., 59 & 62
lx & ly = the number of persons living at ages x and y in
Table 2000CM (http://www.irs.gov/Retirement-
Plans/Actuarial-Tables)
Or, for an actual
contribution,
you can ask the
IRS to calculate
this for you

For a fixed term, just assume
value of depreciable part
reduced by (term/useful life)
Ex: In 20 years house will be valued at
$20,000 land + $10,000 salvage +
[$70,000 x (20/45)], or $61,111.
Deduction is $61,111 X remainder
value for 20 year term certain from
table B www.irs.gov/Retirement-Plans/Actuarial-Tables

What if the donor
leaves?
Agree with
the charity to
a joint sale
and divide
proceeds
Give life
estate to
charity in
exchange for
a gift annuity
Give life
estate to
charity
Rent
property
Sell life
estate

Will the donor
maintain the
property?

What if I make
improvements to my
residence after giving
a remainder interest?

Can deduct the
remainder value
of major
improvements
as additional
giftsPLR 9329017; PLR 8529014

Charitable gifts of remainder
interests in homes
and farms

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This slide set is from the curriculum for
the Graduate Certificate in Charitable
Financial Planning at Texas Tech
University, home to the nation’s largest
graduate program in personal financial
planning.
To find out more about the online
Graduate Certificate in Charitable
Financial Planning go to
www.EncourageGenerosity.com
To find out more about the M.S. or
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Texas Tech University, go to
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Graduate Studies in
Charitable Financial Planning
at Texas Tech University

Gifts of Remainder Interests in Homes and Farms

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