Donating to Save Taxes and Headaches

After years of building their equity, many owners of real estate find themselves trapped between the project of keeping properties that are difficult to manage or maintain against high capital gains consequences if they decide to get off the 1031 merry-go-round and sell.

Provided they own the properties free and clear, there are some available options that include donating the property and setting up an entity such as a Donor Advised Fund or a Charitable Remainder Trust, under which ownership of the property is signed over to the family’s choice of a non-profit entity.  Once the proper arrangements are made, family members or other designated parties can maintain continued use of the property during their lifetimes, and income streams can be set up to take the place of rents from the property which was signed over, without the hassles and liability of continuing to manage or maintain it.

To set up a Donor Advised Fund you choose a sponsor, such as a community foundation, a national sponsoring organization, or a financial institution or brokerage after comparing options based on administrative fees, investment allocation choices, and any initial contribution minimums. You get to designate primary and successor advisors and can also select an investment allocation to choose how your contributed assets will be invested for potential tax-free growth from the sponsor's menu of options. And once you have it set up you can fund the account by contributing cash, appreciated stock, or other eligible assets like real estate.

For a Charitable Remainder Trust, you can choose between an option that pays a fixed annual dollar amount, or one which pays a fixed percentage of annually revalued trust assets. Assets to fund the trust can include highly appreciated property, publicly traded securities, or real estate. After the assets have been put in place, you name the income beneficiaries to receive payments for a term of up to 20 years or for life, and designate a qualified tax-exempt organization or Donor-Advised Fund to receive the remainder.

It is always advisable to work with an experienced estate planning attorney to draft your documents for whichever entity you set up to ensure it satisfies IRS rules, payout rate limits, and complies with remainder value requirements of at least 10% in the case of a Charitable Remainder Trust.

Once you have everything in place, you can legally transfer the assets into the trust before any sale occurs, and you will need to obtain a professional appraisal if funding the trust with non-cash or non-publicly traded assets, to help establish compliance for annual tax filings. And at the end of it all you get to leave a lasting legacy. 

There are multiple local attorneys and organizations I can connect you to who have ample experience in getting these types of solutions put together with a broad array of options to fit the particular needs of your situation, and you are welcome to reach out if you would like to arrange a meeting to go over the variables of your property and ownership to see if this type of a solution is right for you.