Case Study: Keeping a Treasured Residence in the Family

Case Study: Keeping a Treasured Residence in the Family

Case study posted in Real Property on 9 August 2012| 1 comments
audience: National Publication | last updated: 13 August 2012


Family homes and/or vacation homes can become associated with happy times and precious family memories. Some families want to keep the home in the family for future generations to enjoy. In this case study and accompanying ten-page report, David Holaday of Wealth Design Consultants describes a unique twist on the traditional strategy of a charitable gift of a qualified remainder interest in a residence. This strategy keeps the property in the family, generates a large charitable gift and accompanying income tax deductions, and reduces transfer tax costs.

By David W. Holaday, ChFC, CAP®

The Facts

Jim and Sally Covey, ages 72 and 71, have two adult children and four grandchildren.  Twenty years ago they bought a house on a nearby lake to enjoy with their growing children.  They named the house “Covey Cove” and it became the center for some of the family’s most treasured memories.  Both of their children were married on the lawn by the shore line.  Their oldest grandchild, now age 11, is talking of being married there also.

Jim and Sally have been very successful in business.  In an estate planning review, their advisors estimated their estate tax liability to be over $5 million.  Covey Cove, with a value of about $1.5 million contributes to this estate tax problem.  One of their primary goals was to keep Covey Cove in the family for the children, grandchildren and great grandchildren to enjoy.  Their advisors discussed several ways to accomplish this.

They considered a Qualified Personal Residence Trust (“QPRT”) but were concerned about the risk of not surviving the trust term.  Moreover, the low interest rate environment was not favorable for QPRTs.  They also considered keeping the property in their estate but worried that, since the property is in such an ideal location, it would appreciate rapidly and exacerbate their estate tax problem.

In the end, they elected to use an innovative strategy involving a charitable gift of the remainder interest in the home.  Normally, this arrangement is used when the client does NOT want to keep the property in the family.  However, in this case, the transaction involved giving the remainder interest to a charity that indicated openness to selling the remainder interest to a family trust.

Overview: Charitable Gift of a Remainder Interest in a Residence

Before going into the details of the whole strategy, here is a quick review of the central idea.  A gift of a remainder interest in a residence or farm is a transaction in which a donor transfers the title to the property to a qualified public charity but retains the right to use the property for a defined period of time, usually for life.  At the end of the period the charity has all rights to the property.  For making a contribution of the remainder interest in a residence, the donor is entitled to a charitable income tax deduction which is computed according to guidelines described in Reg. §1.170A-12.  The value of the property must be substantiated by a qualified independent appraisal.  The charitable deduction is useable up to 30% of the donor’s adjusted gross income.  Any unused deduction can be carried over an additional five years.  If the property is encumbered, this transaction is also subject to the bargain sale rules.  The gift agreement between the donor and charity will specify (among other things);

  • The life estate and remainder beneficiaries;
  • The length of the term; and
  • The responsibilities of the donor/tenant (Usually the tenant has full responsibilities for upkeep and maintenance.)

Simply giving the remainder interest in Covey Cove to charity would not accomplish their goal of transferring the home to their family.  They needed a way for the family to acquire the remainder interest from charity in order to achieve their goal.

How It Works

First, Jim, Sally and their advisor explained the idea to the president of a local charity with whom they have been involved for years.  After receiving an initial indication of interest (but no promise or guarantee), they proceeded.

Jim and Sally entered into a life estate agreement with the charity.  They contributed the remainder interest in the home and retained a life estate, giving them the ability to enjoy the home for their joint lives.  Based on their ages, the property value of $1.5 million, the current Section 7520 rate of 1.4% and other factors, they expected a current charitable income tax deduction of $980,000.  This was timely because their business had a very profitable year that year.

The Coveys also established a Dynasty Trust and funded it with $100,000 of cash.  They named their daughter Jennifer as the trustee. 

After three years passed from the time of Jim and Sally’s initial gift, their daughter Jennifer, as trustee of the Dynasty Trust, approached the charity that received the gift and made an offer to buy the remainder interest in Covey Cove.  The charity hired an expert to determine the value of the remainder interest based on Jim and Sally’s life expectancies at the time.  The parties reached an arm’s length agreement in which the Dynasty Trust would purchase the remainder interest for a price of $980,000.  It was coincidental that the purchase price was the same as the charitable income tax deduction since the valuation method used to computing the charitable deduction and the valuation method used under a willing buyer and willing seller method were different. The terms of sale involved a down payment of $100,000 with the balance of $880,000 being amortized over 15 years with an interest rate of 3.0%.  This resulted in annual payments of approximately $74,000.

Jim and Sally planned to make annual exclusion gifts to the Dynasty Trust each year to enable it to make the $74,000 payments to the charity/seller.  They are delighted that these funds will ultimately end up with this charity since they have been active supporters for years and were already making charitable gifts of nearly this amount.

The Dynasty Trust, as the new owner of the remainder interest in the house, will become the sole owner of the property at the death of the survivor of Jim and Sally.


What assurance could the Coveys have that charity would sell the remainder interest in their home to the family trust?

Their advisor explained to them that there could not be any written or verbal guarantee from the charity in advance that it would sell the remainder interest to the Dynasty Trust.  Naturally, this was a huge concern since Jim and Sally’s main goal was to keep the property in the family.  The president of the charity, who was a personal friend, explained the process that they must go through to determine the fair market value.  The President explained that it was his opinion that there was little chance that a non-family investor would have any interest in purchasing the asset.  Moreover, it was his belief that the charity would be well served if they were able to sell the remainder interest (a non-liquid and non-income producing asset) for a reasonable price on reasonable terms.  This gave Jim and Sally the confidence to move forward.

How will the Dynasty Trust make the payments if Jim and Sally do not survive long enough to make gifts?

Jim and Sally realized that the Dynasty Trust would be depending on them to make annual gifts to the trust so the trust could make the installment payments to the charity/seller.  Their lawyer assured them that it would be a simple thing to amend their revocable living trust document to provide funding from their estate if needed.

The Results

If Jim and Sally kept the property and if it doubled in value over 15 years, their estate liability could increase by approximately $1.35 million assuming a 45% estate tax rate.

Instead, they plan to make gifts to their Dynasty Trust totaling about $1.2 million over a 15 year period.  Their initial $980,000 charitable income tax deduction could save them nearly $400,000 in federal and state income taxes assuming a 40% tax bracket.  Thus, they expect their net cost to be about $800,000, approximately 40% less than the “keep the property” plan.  Moreover, their out of pocket costs will go to charity instead of taxes.

Additional Information

If you would like additional information about this strategy, please refer to the attached ten-page strategy summary.  In addition, you may contact the author at or call (317) 571-3616 and reference the Residential Remainder Interest Gift and Purchase Sample Plan.

© 2012 Wealth Design Consultants, LLC. Used by permission.

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Re: Case Study: Keeping a Treasured Residence in the Family

It's hard to let go of something specially when it was yours all your life. Glad to know there's a strategy to keep the place.

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