Remainder in Residence or Farm

[Kathleen Reynolds]

#3074

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A Charitable Remainder in Personal Residence/Farm provides a gift to charity of a future interest in a personal residence or farm with the donor(s) reserving the right to live in or use the property for a term of years or for a life span. In other words, an irrevocable trust is established with the trustee directed to pay to the grantor the income from the trust for a specified number of years.

This trust can be distributed for a “term of years” or for “life.” The program handles five lives, but there is no statutory limitation on the number of income beneficiaries a charitable remainder trust may have.

If it is distributed for a term of years, the trust provides periodic distributions to non-charitable beneficiaries for a period not in excess of 20 years.

If it is distributed for life, the trust provides periodic distributions to a non-charitable beneficiary for a period not in excess of the life of this individual income beneficiary.

If it is distributed for two to five lives, the trust provides fixed periodic distributions to these non-charitable beneficiaries for a period not in excess of the lives of those individual beneficiaries.

The Tax Savings report illustrates how a Charitable Deduction is distributed over a period of years. The report shows the current year and the next five years, which is the maximum period allowed for distributions.

Multiplying the Charity Type (60%, 50%, 30%, or 20%) and the Adjusted Gross Income calculates the amount of deduction taken annually from the trust.

The report shows how much of the charitable deduction is used each year, as well as the annual tax savings generated from the charitable deduction.

Entering Data

• Calculation Type: Select Life or Term.
• Transfer Date: Enter 1 to 12 to indicate the month for the transfer date and then enter the year of the transfer (mm/yyyy).
• See Transition Period Notes below
• §7520 Rate The program automatically displays three allowable 120% Midterm Applicable Federal Interest Rates (the current month and two preceding months) and places the rate that is most favorable in this input. You can override the program’s value by entering another rate. In which case, the phrase “Invalid §7520 Rate” appears. In some cases, 30% will appear as a rate. Thirty percent is the default value that appears when there is not a current AFR available for the chosen month. Download or manually update your AFR table. Check our web site at https://www.brentmark.com for an updated list of AFR Rates.
• Land Value: Enter the appropriate value of the land as of the date of the gift. If the valuation is for estate or gift tax purposes and you take the position that depreciation is considered only for income tax purposes, you would enter the total value of the property transferred here and enter zero for the following two depreciable property value inputs.
• Estimated Useful Life in Years: Enter the estimated year span (beginning with the date of the contribution) over which the depreciable property is going to be used.
• Payment Years: Enter the duration of the trust, for a period not in excess of 20 years. Valid entries are 1-20. This data input field will only be available when Term is chosen as the Calculation Type.
• Lives: Enter the number of lives (up to five) that will be used to determine the distribution. The Pooled Income Fund handles Life scenarios only.
• Ages: This data input field is only available when Life is chosen as the Calculation Type. Use a value from 0 to 109 to indicate the age of the person whose life is being used to measure the term of the trust. Enter the age of this person(s) using the birth date which is nearest to the transfer date.
• Depreciable Property Value on Date of Gift: Enter the value of the depreciable part of the property as it is on the date of the gift. The sum of the Land Value and the Depreciable Property Value on Date of Gift should equal the fair market value of the property.
• Depreciable Property Value at End of Useful Life: Enter the value that is expected at the end of the estimated useful life. The program will not accept the entry of a value higher than the Depreciable Property Value on Date of Gift.
• Income Tax: The Tax Cut and Jobs Act of 2017 sunsets in 2026. Indicate whether or not you wish to assume that the income tax provisions of that act will sunset.
• Cost Basis: Enter the amount of basis for the asset being placed in the trust.
• Charity Type Choose 50%, 30%, or 20%. All qualified non-profit organizations will fit within one of thse types (IRS Publication 78). There is also special consideration for Cash, 60%. For more information, visit: https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions#:~:text=ln%20most%20cases%202C%20the%20the%20amount,not%20subject%20to%20this%20limitation
• Capital Gains Rate: Enter the income tax rate that applies to capital gains property.

Income Tax Inputs

• Sunset in 2026? The Tax Cut and Jobs Act of 2017 sunsets in 2026. Indicate whether or not you wish to assume that the income tax provisions of that act will sunset.
• Adjusted Gross Income Enter the total estimated amount of adjusted gross income for the year in which taxes are being calculated.
• Total Itemized Deductions Enter the estimated total of allowable itemized deductions.
• Deductions Not Subject to Phaseout Enter the estimated total of allowable medical, casualty, or theft losses, and investment-interest deductions (subject to the regular limits and restrictions discussed above).
• Total Long-term Capital Gain Enter the total net gain from the sale or disposition of capital assets held for more than one year that has been included in adjusted gross income.
• 28% Rate Capital Gain Enter the total net gain from collectibles and section 1202 that has been included in adjusted gross income. (See IRC section 1(h)(4).)
• Qualified Dividends For years 2003 and following, enter the total amount of dividends that are included in adjusted gross income and qualify for the special tax rate for long-term capital gains.
• Unrecaptured §1250 Gain Enter the amount of long-term capital gain included in adjusted gross income that would be ordinary income if section 1250 applied to depreciation in excess of 100% straight-line depreciation. (See IRC section 1(h)(6).)
• Net Investment Inc. For tax years after 2012, enter the amount of net investment income as defined by IRC section 1411(c) that has been included in adjusted gross income. In general, net investment income is investment income such as interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses trading financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of section 469), reduced by deductions properly allocable to those incomes, such as investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust), and state and local income taxes.
• Filing Status Choose the applicable filing status (Single, Joint, Separate, Head of Household).
• Age in Tax Year Enter the taxpayer’s age at the end of the tax year being calculated.
• Spouse’s Age in Tax Year Enter the age of the taxpayer’s spouse at the end of the tax year being calculated.
• Personal Exemptions Enter the number of allowable personal exemptions for the taxpayer and any dependents.
• Estimated Inflation Enter an inflation rate to be applied to bracket amounts and other deductions in future years. For the current year or past years, this input is not applicable.

Results

Summary for a Remainder Term Case

The summary report shows the direct results from the values that are entered into the input fields.

• Total Value of Property: This number is the sum of the Land Value and the Depreciable Property Value on the Date of Gift.
• Depreciable Part (DP): Indicates the dollar value of the property that is depreciable. Use the following formula to attain the value:
• (DP Value On Date of Gift – DP value At End of Useful Life) x (Payment Years or DP Value At End of Useful Life* / DP Value At End of Useful Life)
• *Use the smallest value of the two: Payment Years or DP Value At the End of Useful Life.
• Nondepreciable Part: Indicates the dollar value of the property that does not depreciate in value. Use the following formula to attain the value:
• (Land Value – DP Value At End of Useful Life)
• Remainder Factor: This factor is used to calculate the charitable deduction. The program derives this number from the Calculation Type used and the ages entered for each life (if a Life calculation is used.).
• Remainder Interest: This factor is used to calculate the charitable deduction. The program derives this number from the Estimated Useful Life in Years input (1-99 years), the number of lives used and the ages entered for each life. When valuing the remainder interest, if part of the real property is depreciable, the adjusted value is subtracted from the value of the depreciable part.
• Charitable Deduction for Remainder Interest: This is the charitable deduction that is derived from the following formula:
• (Nondepreciable Part x Remainder Factor) + (Depreciable Part x Adjusted Remainder Factor)

Results for a Life Case

The summary tab shows the direct results from the values that are entered into the input fields.

• • Total Value of Property: This number is the sum of the Land Value and the Depreciable Property Value on the Date of Gift.
  • Depreciable Part: This number represents the dollar value of the part of the property which depreciates over time. The result is obtained from the following equation:
  • Depreciable Amount on Date of Gift – Depreciable Amount at End of Useful Life
  • Non-depreciable Part: This number represents the dollar value of the part of the property which does not depreciate over time. The result is obtained from the following equation:
  • Land Value + Depreciable Amount at End of Useful Life
  • Remainder Factor: This number can be obtained from column 4 of Table A for transfer dates prior to May 1989. Use column 4 of Table S (this value can be obtained from the IRS Publication 1457, Actuarial Values Alpha Volume) for transfer dates after April 1989. It is applied to the non-depreciable part of the property.
  • Adjustment Factor: The adjustment factor is determined by dividing (i) by (ii):
    • (i) s the difference between: the R-factor in column 2 of Table C opposite the initial age of the life tenant in column 1. the R-factor in column 2 of such Table opposite the terminal age in column 1.
    • (ii) is the product of: the estimated useful life of the depreciable property. the D-factor in column 3 of the Table opposite the initial age of the life tenant in column 1.

    This adjustment factor is carried to five decimal places. Different R-factors and D-factors are used for transfers after April 1989, as opposed to those used for transfers prior to May 1989.

Charitable Deduction for Remainder Interest: Valuation of a remainder interest in real property following one life is determined under IRS rules (§25.2512-5(d) for transfers after November 30, 1983). The remainder interest is obtained from the following formula:

(Nondepreciable Part x Remainder Factor)+(Depreciable Part x Adjusted Remainder Factor)

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