Real Estate Gift Subject to Retained Life Estate

Case Study

Joseph has been living with his wife Nancy in a Boston suburb for the last 15 years. Now ages 75 and 72, they have been working with their advisors to update their estate plans. They were quite surprised to learn that their modest three bedroom home, with its mortgage paid off several years ago, was now worth approximately $1.3 million.

Joseph and Nancy are healthy and active, and think of themselves as years away from moving from the home in which they are so comfortable. Their children are grown and successful in their own careers, and Joseph and Nancy have otherwise provided for the children modestly in their estate plans. So, as they updated their wills, they considered leaving their home to Amherst College.

When they discussed with their attorney the possibility of bequeathing their home to the College, she suggested they consider, as an alternative, the possibility of deeding their home to the College now, but retaining a life estate in the property. Such an arrangement would mean that they could continue to live in the home for the rest of their joint lives, or as long as they wished, while continuing to maintain the property, pay taxes and utilities, and be free to rent it out, etc. At the time of their deaths, or earlier if they so chose, the College would take possession of the property, sell it, and use the funds for its general educational purposes.

Joseph and Nancy were particularly attracted to two aspects of the retained life arrangement. First, they would be entitled to a very substantial income tax charitable deduction at the time they entered into the arrangement. (Based on their ages, the estimated value of the house, and other factors, their accountant estimated their potential deduction at about $525,000, which could be used over a total of six years.) By contrast, if they were to leave their home to the College by bequest, they would be entitled to absolutely no charitable income tax deduction.

Second, if they were to enter into the retained life estate arrangement, they would not have to worry about later selling the house. That would be for the College to handle.

Summary of Benefits to the donor(s)
  • Avoided capital gains tax that would accompany a sale
  • Generated an immediate income tax deduction of approximately $525,000 useable over up to six years
  • Reduced their taxable estate
  • Avoided the burden of selling the house
  • Satisfaction of making a significant gift to Amherst during their lifetimes, rather than at death.
Summary of Benefits to Amherst College
  • Net sales proceeds well in excess of $2.5 million (assuming joint life expectancy of 17 years, annual appreciation of 5%, and other factors)
Information contained in this website should not be considered legal, accounting, or other professional advice. Individuals considering a planned gift to Amherst should consult with their financial advisor.

For more information about making a planned gift to Amherst, please contact the Gift Planning staff.