Life estate gifts involve the gift of a personal residence or farm subject to a retained life estate. The retained interest also can be an estate for a term of years.

“Estate” means the exclusive right to occupy or the right to rents (e.g., in the case of a farm leased to a tenant).

“Personal residence” means a house and accompanying land owned by the donor and used by the donor as his or her residence. It does not have to be the primary residence, but it must not be rental property.

In my experience, this sort of gift is uncommon. Which is puzzling, because it’s a good fit for many potential donors: a current charitable deduction with no current out-of-pocket outlay and no necessary change of life style.

There can be problems with this kind of gift, however:

• The donor is going to have to get a qualified appraisal.
• If there’s a mortgage on the property, the gift will be a bargain sale.
• It’s possible the donor at some point will let the property fall into disrepair.
• It’s also possible the donor will begin at some point to make demands, such as a demand to replace a broken window or a demand to remove a broken tree branch.
• The donor may fail to make property tax payments.

A side agreement is needed to avoid donor-relation problems, but even the best side agreement is no guarantee that problems will be avoided, particularly if the donor’s mental state deteriorates.

You should either have experience or have an adviser who has experience dealing with this sort of gift if you’re going to work with a prospective life estate donor.

If you want guidance on this sort of gift, be sure to check with your Sharpe Group rep.

By Jon Tidd, Esq