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A CRUT cannot be funded with mortgaged real estate. The three best options are:
- The donor can pay off the mortgage with other assets and funds the CRUT with the real estate. He could even mortgage some other piece of property and then use some of the income from the CRUT to make the mortgage payments.
- If your charity's gift acceptance policies and your state's regulations allow, the donor can fund a Charitable Gift Annuity (CGA) with the value of the real estate minus the mortgage.
- The donor can give your charity the property through a bequest.
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In most cases, yes. Remember that an asset like that may not be producing income, and so the unitrust's beneficiaries may receive little or nothing until a sale and re-investment into income-producing assets.
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In many cases, yes! Real estate is most often placed in a charitable remainder unitrust, which will pay income to you, your spouse, and/or other beneficiaries, and provide you with income and capital gains tax benefits. (For more information on unitrusts, go to gift plan details and sort for unitrusts.)
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For all gifts of real estate worth more than $5,000, fair market value will be determined by an independent appraisal that you will obtain.
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- You receive an income tax deduction equal to the appraised fair market value of the property, with no capital gains tax due on the transfer to us.
- You remove a large taxable asset from your estate.
- You can take advantage of a variety of gift formats available for a donation of real estate, each offering unique planning benefits.
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They can use cash, securities (stock, bonds, mutual fund shares) or real estate. They can give tangible personal property (artwork, books, artifacts, equipment, etc.) They can fund a gift plan with a business or partnership interest (closely held stock, a share in a professional corporation, an investment in a limited partnership). They can give you a paid-up life insurance policy. Donors can also direct a charitable distribution from the balance remaining in their retirement plan (IRA, 401(k), Keough, etc.) at death. They can also make your organization the owner and beneficiary of a new life insurance policy. Note: Some gift assets can prove challenging for a non-profit to administer and/or liquidate, and your organization should review offers of non-traditional assets carefully before accepting them.
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I'd like to address your questions:
- Real estate used to fund a Charitable Trust does not avoid ad valorum taxes (property taxes) whether or not the donor is alive or deceased.
- Personal residences can not be used to fund Charitable Remainder Trusts in case where the donor wishes to remain in their house for the rest of their life. (Not deductible under IRS guidelines for a charitable gift deduction)
- To read about various charitable trust arrangements visit the George Washington University's Planned Giving web site: http://www.gwu.edu/give/waystogive/plannedgifts
Should such a gift be completed and the church owned the property for their use there would be no property taxes assessed.
There might very well be other variations on the theme which would accomplish your goals but would take investigating all of the party's goals. If I can be of any further assistance please let me know.
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- 45% of wealth in USA is in real estate equities, 7% cash, stocks and bonds 40%
- Of the $300 Billion in gifts to charities last year only 2% was in the form of real estate
- Charities reject approximately 80% of all real estate gifts out of hand for fear of risk factors
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- Several acceptable disposition methods to avoid risks to the charities
- Use of options to transfer equities
- Simultaneous closings to keep the charity out of the chain of title
- Use of third party facilitating charities or support organizations
- Consulting services available to manage the process
- Sharing of the gift with charity that does know how to avoid pitfalls and garner the benefits. This may be 65/35 or 50/50 for example.
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- Help avoid capital gains taxes on the sale of property
- Shelter federal and state income tax burdens
- Light the costs of estate taxes for their heirs
- Relieve themselves from management and liability issues
- Provide a legacy and support several of their favorite charities in a single gift
- Have an opportunity to create a life time income stream greater than the one presently being produced by the real estate
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The concept of donating versus selling is most easily explained with an example: A 69 year old widow owns an office building. She would like to maximize the benefits of the asset for her children, and support her favorite charity, if possible. The table below summarizes her options. After careful consideration, she found the greatest benefit to her children and the charity was to donate the building. Real Property Liquidation | | Sale & subsequent death | Hold & subsequent death | Donation | Value | Appraised value $10mil; (example assumes full sale price) | $10 mil | Donor gets credit for full amount of appraised value ($10mil). | Seller’s Current Basis | $500k | $500k | N/A | Sales Cost | $500k | N/A | Donor avoids any sales cost, recapture, capital gains taxes, and a portion of his ordinary income tax and eventually estate taxes. | Recapture on Sale | $3mil (tax $900k 30%) | N/A | Capital Gains Tax (25%) | $1.5mil | N/A | Net from Sale | $7.1mil | N/A | Annual income payment will be arranged at $700k for the rest of donor’s life (subject to income tax). | Federal Estate Tax on Net From Sale | $3.9 mil due at death | $5.5 mil | N/A | State Inheritance Tax (7%) | $500k | $700k | N/A | Heirs receive… | $2.7 mil after tax | $3.8** | Upon death of donor, heirs receive $6mil, tax free from life insurance trust fund.* |
Additional notes: In the "Sale" scenario, to generate an income of $700k/year (as in Donation scenario) on the proceeds after selling the property, donor would have to invest long term safely at 11% rate of return.*- Due nine months from death in cash. **- Less sales cost and discount for cash
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Banks outsource real estate to designated brokers who may not be totally qualified to handle a particular type of real estate. Furthermore, the designated broker may not be an expert in the area where a piece of real estate is located. In addition, most real estate professionals are not up-to-date on laws and regulations governing charitable contributions. Experts who specialize in handling such transactions recognize these inherent pitfalls for trust officers. They are dedicated, full-time, to supporting advisors, donors and charities, alike with a network of professionals that have access to updated issues as they relate to donated real estate.
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Attorneys are experts at the law. Just as the bank trust departments outsource their real estate services, estate planning professionals must rely on outside professionals to complete these real estate transactions. Donors should suggest that an expert be brought in as a service provider in the real estate process. It is the expert's responsibility to manage real estate state transactions so that maximum benefits for both the donor and charity can be achieved. This can be accomplished at no additional cost to the donor. A full-time commitment to real estate as it relates to charitable giving provides experts with the knowledge to structure unique, creative, even unusual transactions that maximize benefits to all parties.
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Most commercial real estate agents have no special training in the intricacies of transactions associated with charitable donations. Planned giving professionals rarely have real estate expertise. This is perhaps why many non-profits are even wary of handling real estate transactions and are missing out on one of this nation's greatest wealth. Clearly, special qualifications are needed.
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The Internal Revenue Tax Codes are updated on an on-going basis. A qualified specialist should constantly monitor IRS changes to capital gains taxes, ordinary income taxes, gift taxes and inheritance taxes so they can provide you, or your company with the most up-to-date advice.
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A qualified, outside expert has usually spent years building relationships and a knowledge of numerous charitable organizations. Utilizing their extensive network, they can assist you in identifying a charity that supports causes that are important to you and/or your company.
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Donating non-productive assets to charity can result in significant tax advantages as well as philanthropic benefits. The goal is to maximize the tax benefits of such donations and design sophisticated structures that meet a variety of corporate goals.
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Model 1 -- Employee Benefits Donor: Donates nonproductive real estate assets into Charitable Remainder Trusts, which fund corporate personnel packages for executive incentives, severance or retirement. Charity: Receives corpus of the trust at termination date of trust. Donor Benefits: Timely property disposal. Tax benefits. Philanthropic funding and alternative funding of employee benefit programs. Model 2 -- Bargain Sale Donor: Sells property through a facilitating charity, a portion of the sale price is returned to the donor and the balance is gifted to one or more charities. Charity: Receives the partial contribution and either uses or liquidates it. Donor Benefits: Property disposal with lower capital gains tax. charitable gift deductions for the contribution and enjoys charitable goodwill while fulfilling philanthropic commitments. Model 3 -- Vacant Land Donor: Sells excess land, originally purchased for a building program, through a professional firm such as Real Estate for Charities. Land has greatly appreciated but lays idle. Donation made to favorite, qualified charity as land-lease or gift. Charity: Either receives right to use (e.g. recreational facility) or revenues from sale. Donor Benefits: When sold, the current appreciated value of land provides large tax benefits. When leased, the donor receives tax credit for donation and expenses of the lease payment. Enjoys goodwill and creates positive corporate visibility in community. Model 4 -- Donor Advised Fund Donor transfers property in which donor retains partial control of the charity's donated distribution. Charity: Receives an ongoing income stream from fund. Donor Benefits: Retain control and protects asset. Receives tax deduction. Enjoys positive community relations and good will
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