By Jim Soft, Planned Giving Specialist
We are currently experiencing a sustained, historic low interest rate environment, which presents an opportunity to generate substantial benefits for; 1) you as a taxpayer; 2) the future of important bear habitat we are committed to preserve, and; 3) the sustainability of Vital Ground.
A seldom-used tax planning strategy, when implemented, can generate all three benefits. This strategy is called a Vital Ground Life Estate.
The Internal Revenue Code allows a charitable deduction when a donor contributes a “personal residence or farm” to charity, but retains use of the property for life, e.g. “Life Estate.”
The personal residence life estate could be your home, a vacation condo, cabin, or a house boat. The requirement is that the residence must contain facilities for cooking, sleeping, and sanitation to qualify.
The farm life estate is defined as any land used to produce crops, fruits, or other agricultural products or the sustenance of livestock.
For example, consider Jim and Linda, ages 70, who enjoy spending holiday weekends and vacations at their $300,000 lake cabin. Their kids have moved miles away to pursue careers and seldom spend time at their once beloved cabin.
While Jim and Linda still use the cabin, they visit it less and wonder if it’s worth continued real estate taxes, utilities, and insurance expenses. If sold, they fear a substantial capital gains tax.
One solution for Jim and Linda is to transfer their cabin to a Vital Ground Life Estate. Not only do they retain “ownership” of the cabin for their lives, but also they generate an immediate charitable deduction in the amount of over $146,000! Because of the low interest rate environment, the value of the remainder interest in Jim and Linda’s cabin, which ultimately passes to Vital Ground, is unusually high for which the Internal Revenue Service grants an exceptionally large immediate charitable deduction. Depending on the couple’s federal and state tax brackets, this deduction could produce an actual tax savings of up to $60,000!
The value of this tax savings can be used a variety of ways. They could use the tax savings to address ongoing real estate taxes and insurance costs. Or, as many tax-wise charitably minded people do, Jim and Linda could use the charitable deduction to move money out of their Individual Retirement Accounts to Roth IRAs––producing a tax-free Roth conversion!
Consider George and Sue, both 71, who have owned 160 acres for 45 years adjacent to an ever-expanding city. George produces honey on the property and tends to his bees as an avocation, and he and his spouse intend to enjoy their surroundings for the rest of their lives. The value of the acreage has grown to $1 million from their original purchase price of $50,000!
George also has an “overfunded” IRA which was the result of a profit-sharing plan from the company for which he worked for most of his career. Now, he is forced to take required annual minimum distributions (RMDs) on which he must pay taxes, even though he doesn’t need the money. He wants to convert his IRA to a Roth but does not want to pay taxes on the conversion.
George and Sue decide to transfer their vital ground to a Vital Ground Life Estate. This arrangement generates an immediate charitable deduction of nearly $600,000, which will enable George over the next several years to move a like amount from his IRA to a ROTH while continuing to enjoy farm life near the big city.
The ROTH will grow tax free, like his IRA, but will not require RMDs and will be considerably more “tax friendly” for his children to inherit. Vital Ground will receive the property when George and Sue both pass away, utilizing the value to further their efforts to conserve and connect wildlife habitat in the Northern Rockies — or invest the property’s value in the Vital Ground Endowment to sustain the organization’s work.
Taking inventory of your vital ground in the financial and estate planning might generate practical as well as altruistic benefits to support Vital Ground’s mission.
For more information, contact Development Director Kim Davitt at 406-549-8650.
Jim Soft’s experience in the charitable sector spans 40 years, including serving on national/local industry boards. He specializes in financial/estate tax planning, redirecting tax dollars to charity, and often increasing cash flow for the taxpayer.