One of my readers spotted a point that I wasn’t addressing which changes the formula I was so excited about – that even though a donor can deduct up to 100% of his/her AGI in 2020 – that only applies to CASH gifts, gifts of appreciated property like a life estates! I am going to adjust the post and still show you how this is still a great opportunity – just not the amazing one I thought it was!

Gift planners and major gift fundraisers, please read this quick post very carefully – it may enable you to close a few huge irrevocable planned gifts by year end.

Recently, a client and myself were discussing a large bequest commitment for a big naming opportunity with a donor – we needed ask the donor how much he would consider putting in an irrevocable vehicle and how much cash (the naming opp was too prominent to be just a bequest commitment).

So, I was armed with a CRT pitch. The donor has a lot of investments and I pitched creating a CRT where the investments can stay with the same brokerage, he could co-trustee and oversee the investments – pretty seamless, he continues to control the assets, probably from the same online account, and he is on board with a large irrevocable piece to pie.  Maybe a $1 million CRT!

Problem was that he still felt uncomfortable with the CRT – sounded too complicated to him (and, to be honest, it is – it would have to be a CRUT and CRUTs need a lot oversight…).  Then, he said what about my house.  Could he give a percentage?

Then it hit me!  Life estate!  Let’s say house is worth $1 million, donor in his 60s, the income tax deduction is around $700,000!  This donor is a high earner – let’s say he is making $500,000 a year, plus some investment income – ok, round down to a $500,000 AGI.

This next paragraph has to be adjusted – see italicized paragraph afterwards.

Guess what? Special Covid year rule – individuals can deduct up to 100% of their AGI – this year only rule!  Meaning, this donor by having his attorney change the title to his house (reserving a life estate for himself, remainder interest to the charity) will probably receive a $125,000-$150,000 income refund this year – maybe as early as April!! (He almost certainly pays plenty of taxes during the year).  Aha – not a bad place to start talking about a cash component? How about the income tax refund as his first year cash pledge?

So, in my excitement, I forgot that the 100% AGI deduction ceiling only applies for cash giving, appreciated property giving is still at the 30% AGI ceiling for 2020.  Using the same assumptions ($500,000 AGI), our donor would be able to deduct around $166,000 from this gift this year (and carry the rest over for another few years) – netting him around a $33,000 tax refund from this gift.  Not bad but not amazing like I thought – see end of post for more thoughts on this.

Guess what? This life estate gift (facts obviously changed!) is very likely happening, this year!  Why? Because the benefits to the donor were clear – he had no problem dedicating his house to the charity towards his ultimate gift, goes towards that commitment as an irrevocable part, and he gets a pretty big refund!  Any deduction not used, carries over until next year or following years..

What do you think?  If you have any donors who are already committing significant amounts of their estate to your charity, are still high earners, why not bring up this great opportunity.  Life estate deductions are very high. And, don’t forget that you could probably secure an additional cash gift based on the refund!

And, guess what – the donor just told us that the life estate has to be done by the end of the year! Surprise, surprise.

So, despite my incorrect assumption (which I did not share with the donor thankfully), the gift is full steam ahead.  This actually shows you that Life Estates are great supplemental gifts to bequest and campaign commitments – regardless we have the benefit of the 100% AGI ceiling or not.  One point I am going to pursue with the donor’s accountant is that a taxpayer can elect to take a tax deduction for the cost basis of an appreciated asset, and have it treated as a cash gift.  So, if our donor paid let’s say $300,000 for the house (not so outrageous an assumption), he could take instead of a $700,000 tax deduction, he could take a $210,000 income tax deduction based on the cost basis of the house.  That would enable him to take the entire $210,000 deduction this year but he would have no carry over for future years. Something to consider but probably not worth it.