Donating land with a life interest: Gift your property while continuing to live on it

Some landowners wish to donate land to the Vermont Land Trust, but not transfer it right away. In this case, a land donation may include the retention of a life interest in the property, which allows you or your beneficiary to continue to use the property. This is also known as a gift of a remainder interest, because what is given is what remains at the time the donor dies (i.e. when the "life interest" ends).

Under this arrangement, ownership of the property will transfer automatically to the Vermont Land Trust without the delay and expense of probate. The property would also be exempt from any claims of creditors against the estate.

How does a gift of a remainder interest work?

The donor executes a standard deed conveying the property to the Vermont Land Trust, but reserves a "life estate" for one or more people (the "life tenants").

The deed stipulates that during the period of the life estate, the life tenants must pay the property taxes, keep the premises insured, and generally maintain the land and buildings in good condition.

If the property generates income during the life tenants' lifetime, the life tenants retain the right to that income. If the property has conservation value, the deed may also prohibit any uses that would diminish or damage those values.

Except for ensuring that its remainder interest in the land is protected, the Vermont Land Trust has no right to use the property as long as any of the life tenants are alive.

If the life tenants no longer wish to use the property, they may release their life estates, accelerating passage of title to the charity, and giving them an additional tax deduction.

Is a remainder interest gift tax-deductible?

A donor can claim an income tax deduction for a gift of a remainder interest when the property:

• is a personal residence, including a second home;
• is a farm;

OR

• has significant conservation, public recreation, or historical value under IRS rules.

We can make a preliminary assessment of deductibility. However, the donor should always seek legal advice before making a charitable gift involving real property.

If the gift is tax-deductible, how is the deduction calculated?

Because the donor is keeping a life interest in the property, the charitable deduction is limited to the present value of the remainder interest that is being given to VLT. That value is determined from actuarial tables published by the IRS.

The value will depend primarily upon the number of people who will hold a life interest, their ages, and the federal discount rate in effect at the time.

The discount rate changes every month, so the financial outcomes in the following example will also vary slightly. VLT can prepare a similar analysis to fit your situation.

As with all charitable contributions, the tax deduction for gifts involving appreciated property is limited to 30 percent of the donor's adjusted gross income. However, any unused portion can be carried over for up to five additional years. 

If the life tenants choose to terminate the life interest early during their lifetime, this will produce additional income tax deduction because of the accelerated passage of title to the charity.

If the property being used for the gift of a remainder interest is subject to a mortgage, special income tax rules may apply which you should discuss with your tax advisor.

What are the estate tax implications of a remainder interest gift?

Where the donor is the only life tenant or the donors/life tenants are husband and wife, a gift of a remainder interest completely removes the property from their taxable estate. However, if the donor names a child or some other person as a life tenant, this may create a taxable gift.

Depending upon the circumstances, the gift may or may not qualify for the annual gift tax exclusion. It may also use a portion of the donor's lifetime gift tax credit, which could result in increased estate taxes at the donor's death.

We can help make a preliminary evaluation of the estate tax consequences of such a gift, but ultimately you should seek your own legal, tax, and financial advice.

What will the Vermont Land Trust do with the property when it assumes ownership?

It is important to discuss the ultimate disposition of the property with us before making the gift. Where the land has conservation value, we will place a permanent conservation easement on the property to protect those values, if it is not already conserved. In most cases, the property will then be sold and the proceeds used to build our financial reserves or to protect other land. If public ownership of the property is appropriate, we may convey the property to a public entity.

How do I get started?

If you are contemplating a donation of real estate to the Vermont Land Trust, it is important to involve us early in the process. We will need to determine that we can accept the gift under our Board policy, search the legal title, and conduct a hazardous waste review, which is now standard procedure in real estate transactions.

We also need to have a complete understanding of your expectations on a number of issues: 1) whether you intend to reserve a life interest for yourself and/or others; 2) what conservation restrictions you expect us to place on the property; and 3) what the disposition and long-range ownership of the property will be.

We can calculate your income tax deduction and draft the deed of transfer if we know: 1) the fair market value of the property (which must be determined by appraisal); and 2) the birthdates of those who will hold life interest in the property.

As with any planned gift, we urge you to consult with your attorney and financial advisor before the transaction is finalized.