Successful Charitable Gifts of Real Estate

Successful Charitable Gifts of Real Estate October 28, 2015

Central New York Community Foundation 315-422-9538 www.cnycf.org

Where the Smart Money Gives.

Thank you to our sponsors for making this program possible! gold sponsors Michael Miller, CFA, Managing Director 750 Third Avenue, 20th Floor New York, NY 10017 212-218-4900 ∙ www.colonialconsulting.com Christine Woodcock Dettor, Esq. One Lincoln Center, Suite 900, Syracuse, NY 315-701-6351 ∙ www.bhlawpllc.com Kenneth J. Entenmann, CFA, Chief Investment Officer 120 Madison Street, Syracuse, NY 315-475-5891 ∙ kentenmann@nbtbank.com

Estate Planning Council of Central New York

Charlotte G. Crandall, Council Executive 606 State Tower Building, 109 S. Warren Street Syracuse, NY 13202 315-474-6775 ∙ cgcrandall@peoplepc.com Bettina Lipphardt, CPA, CIA 115 Solar Street, Suite 100, Syracuse 13204 315-214-7575 ∙ blipphardt@bonadio.com

continuing education sponsors Gay M. Pomeroy, Esq. 101 South Salina Street, Suite 600, Syracuse, NY 315-474-7571 ∙ www.mackenziehughes.com Uri (Chip) Doolittle, CFP, AIF, President 315-637-5153 ∙ chip@doolittlefinancial.com Madelyn Hornstein, CPA, CEO 443 North Franklin Street, Suite 100 Syracuse, NY 13204 315-471-9171 ∙ www.dbbllc.com Lee M. Gatta, CLU, CLTC, AEP, ChFC Matthew Dauksza, Managing Director, CLU, CFP 5786 Widewaters Parkway Dewitt, NY 13214 315-350-2460 ∙ lee.gatta@prudential.com John Poli, President 315-474-6775 ∙ cgcrandall@peoplepc.com Central New York Community Foundation 315-422-9538 www.cnycf.org

Where the Smart Money Gives.

October 28, 2015

Dear Advisor, Gift planning is a broad topic that can have significant benefits for your charitable clients. This year we focused our presentation on one major area of wealth: real estate. Using real estate to make charitable gifts can be extremely effective, but can also be more complicated. Our presentation today was created to combine my experience in this area with the experience of Michael Degenhart from the Office of Gift Planning at Penn State University. Together, we hope that our discussion and case studies will help you to identify opportunities for your clients to make successful charitable real estate gifts.

The Community Foundation’s staff is available to be a part of your team whenever charitable planning is on the list of topics for your clients. This is true even in situations where we are not going to be a part of the solution. Of course, we are proud of the fact that our mission and purpose offers the flexibility to accomplish a wide spectrum of charitable goals. Whether we are helping a client to structure a planned gift for the benefit of our community, or simplifying their current giving through a donor-advised fund, we will partner with you to leave your clients feeling happy with the outcome of their planning process.

The best way to find out if the Community Foundation can support you in accomplishing your clients’ goals is to ask. We are available when needed to help find the right giving option for your client’s particular situation – be it legal, financial or other. We hope that you will come to think of us as your ‘charitable back office’, freeing you to focus on your area of core competency.

We have a wealth of written materials that you can use when working with clients. Additionally, we are also available to meet face-to-face with you individually or including your client. Please contact Tom Griffith, Director of Gift Planning, at 315-883-5544 or tgriffith@cnycf.org with questions or to schedule a meeting.

Thank you for joining us this morning. I hope we have an opportunity to work together in the future.

Sincerely,

Peter A. Dunn President & CEO

Central New York Community Foundation 315-422-9538 www.cnycf.org

Where the Smart Money Gives.

Agenda 7:30 am:

Registration

8:00 am:

Welcome and Introductions

8:10 am:

Presentation by Michael J. Degenhart and Peter A. Dunn, J.D.

9:50 am:

Questions & Answers

Central New York Community Foundation 315-422-9538 www.cnycf.org

Where the Smart Money Gives.

Michael J. Degenhart Michael J. Degenhart is currently serving as the Assistant Vice President of the Office of Gift Planning at The Pennsylvania State University, where he is responsible for the development and implementation of university-wide planned giving efforts for Penn State’s 24 campuses.

Widely considered a leader in the field of higher education gift planning, Michael has the unique ability to articulate very technical gift planning techniques in simple, understandable terms for donors. At Penn State, Michael and his office are tasked with an overall combined gift planning goal of $70 million annually. He is a key member of the senior management team that directed Penn State’s recently completed $2 billion comprehensive campaign.

Preceding this position, Michael served three years as the Assistant Vice President for the Office of Gift Planning at Syracuse University and before that he spent seven years as the Associate Director of the Office of Trust, Estates & Gift Planning at Cornell University. Before pursuing a career in higher education advancement, Michael served as Vice President in the Private Client Group with Robert W. Baird & Co. He is an Accredited Estate Planner. Also, Michael joined Grenzebach Glier and Associates (GG+A), in 2010 as a Consulting Vice President for Gift Planning. GG+A is one of the leading international consultancies providing philanthropic services and counsel to a range of nonprofit organizations and the foremost authority on fundraising best practices.

Central New York Community Foundation 315-422-9538 www.cnycf.org

Where the Smart Money Gives.

Peter A. Dunn, J.D. Peter Dunn has more than 20 years of experience in the community foundation field working in support of the growth of the philanthropic sector. In 2008, Peter became the third President and CEO of the Central New York Community Foundation in Syracuse, NY. The largest philanthropic foundation in the Central New York region, the Community Foundation currently administers more nearly 700 component charitable funds with a collective value of nearly $190 million. In its most recent fiscal year, the Community Foundation distributed $9.9 million in grants and support for local leadership initiatives and nonprofit capacity building programs. The Community Foundation has distributed more than $135 million to local charities since its inception.

Previously, Peter was Vice President, Philanthropic Services with the California Community Foundation in Los Angeles, CA. Peter joined the California Community Foundation as Gift Planning Officer in 1996, became Director of Gift Planning in 1998 and the foundation’s chief development officer in 2006. During his tenure, the foundation’s assets grew from $200 million to more than $1.3 billion and it received more than $1.2 billion in charitable contributions – in the process becoming one of the nation’s top ten largest community foundations. From 1994 to 1996, Peter was Program Coordinator for Community Foundation Services at the Council on Foundations in Washington, DC. At the Council, Peter managed programs addressing community foundation legal, development, marketing and investment issues, the creation of foundations resulting from the conversion of nonprofit hospitals and the issuance of FASB SFAS 136 affecting nonprofit fund management. He began his nonprofit career as a campaign fundraiser for the United Way of Buffalo and Erie County in 1993.

In June 2011, Peter was appointed by Attorney General Eric Schneiderman to the Attorney General’s Leadership Committee on Nonprofit Revitalization. He is currently a member of the board and treasurer of the NY Funders Alliance, a regional association of foundations, Volunteer Lawyers Project on Onondaga County and Syracuse Say Yes Scholarship Fund. He is also a member of the boards of Syracuse 20/20, and CNYArts and the Early Childhood Alliance leadership council.

Central New York Community Foundation 315-422-9538 www.cnycf.org

[Divider Page] Tab: “Resources for Advisors”

What is a Community Foundation?

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A tax exempt public charity

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Receives, manages and distributes charitable funds

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A collection of permanent charitable funds reflecting numerous purposes and philanthropic goals

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Through its Community Funds, a grantmaking foundation having impact on local needs, concerns and issues

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A convener and resource for local nonprofits

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A resource for personal and family philanthropic planning and complex charitable gift plans

Central New York Community Foundation 315-422-9538 www.cnycf.org

Discussing Philanthropy With Your Clients As a professional advisor, you earn the respect of your clients in large part by your willingness to discuss delicate topics and to help clients reach important decisions. A client who knows how to use professional advisors to their fullest will expect them to have independent viewpoints and information about the world that is beyond the client’s own knowledge.

Today, philanthropy can be an integral part of a client’s financial and family goals. Much of the growth of community-based philanthropy is due to the efforts of professionals like you suggesting philanthropy as part of the tax and estate planning strategy.

The Central New York Community Foundation recognizes the additional time necessary to develop in-depth conversations about charitable giving.

We hope to provide valuable opportunities for you to help you solve problems for your clients. This morning’s presentation is one such opportunity.

How do you, the professional, initiate the topic of philanthropy with your clients? Think about questions such as these when discussion their goals. 

Beyond family and business, what is important to you?



What does giving mean to you?

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What do you want your philanthropy to say about you? Your family?



Which volunteer experiences have been most rewarding to you?

Central New York Community Foundation 315-422-9538 www.cnycf.org

Discussing Philanthropy With Your Clients (cont.)

What options does the Central New York Community Foundation offer your clients?

We offer a variety of options for permanently endowed funds that provide perpetual support for your community or temporary funds that address needs of immediate interest to your clients.  Community Fund: Responds to the ever changing needs of the community  Fields of Interest Fund: Supports particular causes such as health, human services, education or the arts  Designated Fund: Allows donors to identify specific grants for not-for-profit organizations  Donor-Advised Fund: Offers participation in the grant process by allowing donor suggestions of grants for not-for-profit organizations  Memorial Fund: Becomes a permanent living memorial to a special person  Scholarship Fund: Assists students in a specified area of study or at a particular school, college or university.

How can these funds be established?

Current Gifts: Cash Appreciated Securities Life Insurance Policies Closely held Stock Corporate Giving Programs Real Estate Charitable Lead Trust

Deferred Gifts: Bequest Under Will Pooled Income Fund Charitable Remainder Trust Charitable Gift Annuity Life Insurance

The Central New York Community Foundation is here to serve the charitable giving and estate planning needs of your clients. For assistance call Thomas Griffith, Gift Planning Officer at (315) 422-9538 or visit our web site at www.cnycf.org/advisor.

Central New York Community Foundation 315-422-9538 www.cnycf.org

Ten Reasons To Partner with the Community Foundation ONE

We enable you to broaden your practice by building on our philanthropic expertise.

TWO

We provide highly personalized service tailored to each individual's charitable and financial interests.

THREE

We are a local organization with deep roots in the community.

FOUR

Our professional program staff's knowledge on community issues and needs is available to donors on request.

FIVE

Our donor-advised funds help people invest in the charities they already care about, and learn about new causes to invest in.

SIX

We accept a wide variety of assets, and can facilitate even the most complex forms of giving.

SEVEN

We offer maximum tax advantage under state and federal law.

EIGHT

We multiply the impact of gift dollars by pooling them with other gifts and grants.

NINE

We offer permanence to donors, through endowment funds and multigenerational involvement.

TEN

We are community leaders, convening agencies and coordinating resources to create positive change.

Central New York Community Foundation 315-422-9538 www.cnycf.org

Typical Community Foundation Clients are: Ages 45-75 • •

• • • •

• • • • • • •

Single or Married Facing Tax Consequences or Capital Gains – Sale of Business – Inheritance – Investment Appreciation Civically Engaged; Starting to be or Has Been on NPO Boards Business Owners Wanting to Give Back to Community Entrepreneurial Approach to Giving Anonymity a Possible Concern Ages 70 and Up Single or Married No Heirs, Children are Comfortable or Children are Disengaged Civically Engaged; Been on Many NPO Boards Charitable Intent Perhaps not Self-Perceived as “Wealthy”, “Millionaire Next Door” Desire to Sustain Long Term Charitable Interests Linkage to Estate Planning Conversations

Central New York Community Foundation 315-422-9538 www.cnycf.org

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Successful Charitable Gifts of Real Estate Featuring: Michael J. Degenhart Assistant Vice President Office of Gift Planning at The Pennsylvania State University Peter A. Dunn, J.D. President & CEO Central New York Community Foundation

Outline of Discussion • Donor motivations for making real estate gifts • What to expect when gifting real estate • Managing risks and best practices • Gift Options/Case Studies

Gifts of Real Estate • Rewards – Real estate represents a good percentage of net worth – Larger gifts – Another type of appreciated property to use for gifting

• Challenges – Complex – Nonprofit capacity – Requires time, expertise, and effort – Involves risk

Why Donors Consider Gifts with Real Estate • Motivations – – – – –

Done managing properties Personal reasons necessitate move Right buyer has come along Larger gifts Do not foresee future appreciation

• Planning Objectives – – – –

Avoid capital gains tax Potentially increase income An outright gift is too much Donor still requires a life income

Ways to Give Real Estate • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Types of Property • • • • • • •

Residential—owner occupied Vacation property Undeveloped land Rental real estate Commercial—office or retail Farms—agricultural REITs and partial interests

Real Estate Entities • Outright – Fee Simple – Partial Interests

• Corporation – C Corp – S Corp – Limited Liability Company

• Partnership – General – Limited

• Other Assets – Trust Deeds – Ground Leases – Property Subject to an Option

Risks Mitigation Areas • For Non-Profits – Condition of title – Condition of property – Environmental liability – Lack of liquidity – Lack of marketability – Reputation – Lack of capacity

• For Donors – Charity fire sale – Lack of charity capacity – On-going carrying costs – Deterioration of property condition

How Can We Reduce the Risk?

• • • • •

Gather and analyze key information early Arrange for a thorough review of the property Take advantage of available resources Actively manage donor expectations Sometimes ask the donor or another intermediary to serve as trustee

Questions the Charity Will Ask • Type and use of property • How is the property titled • Estimate of property value and marketability • Whether there is any debt • Ask for copies of: • Deed granting property to the donor.

• Most recent tax bill noting the assessed valuation

Appraisal Requirements • • • • • • •

Situations when needed Who does it How it’s done When it’s done Who pays for it Multiple appraisals IRS Forms 8283 & 8282

Property Review by the Charity • Site visit • Complete a property checklist • Take lots of photographs • Title inspection • Evaluation of marketability • Recent listings and sales/broker opinions • Evaluation of property condition • Environmental • Structural

Environmental Assessments • Phase I—Audit • Site and title inspection • Search of governmental databases • Research historical uses of property and environs • Phase II—Audit • Air, water, soil, and/or building material testing • Phase III—Remediation • Remediation plan including risks and costs

Who Pays for What?

Examples of Post-Gift Property Expenses • • • • • •

Property taxes Utilities Fix-up costs Insurance Maintenance “Surprises”

It is critically important to explain to the donor that he or she might need to contribute assets for the payment of property-related expenses. In many cases, this will be delineated in a gift agreement between the charity and the donor.

Mortgaged Property • • • •

Bargain Sale - Capital Gains Problem Needs Lender Approval Unrelated Business Taxable Income (UBTI) Issue Charity Policy – e.g., less than 25%

• Refinance Option • Partnership/Sale Option • With Trusts – Self Dealing – Loss of Tax Exemption – Options

Gift Options • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Outright Transfer Conceptually simple: just a deed Deduction for fair market value (FMV) Impact of “excess” depreciation Avoidance of capital gains tax (at two different rates?)

• Prearranged sale danger • • • •

Case Study • • • •

Cabin worth - $235,000 Cost basis - $30,000 FMV Deduction; capital gains tax avoidance Fulfillment of objectives

Gift Options • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Retained Life Estate (RLE) • • • • •

Personal residence, vacation home, farm Made by special deed Tax benefits Unique appraisal requirements Advisability of agreement re: various issues

RLE Agreement • Responsibilities of “life tenant” • Responsibilities of charity • Addressing “what ifs”

Options for Ending RLEs • Life tenant lease out property and keeps proceeds • Life tenant & charity sell to a third party – Split proceeds based on life expectancy

• Life interest contributed to charity – Additional deduction equal to actuarial value of the life interest

Case Study Couple ages – 75 and 72 Small farm worth - $470,000 Improvements currently worth - $185,000 $285,722 deduction (assuming a 2% IRS Discount Rate) • Fulfillment of objectives • • • •

Gift Options • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Bargain Sale • • • • •

Sale to charity at bargain price Deed plus evidence of gift intent Tax deduction Cost basis prorated De facto bargain sale

Installment Bargain Sale • Payments spread over more than 1 year • Deduction a function of present value • Payments taxed in different ways • Unrelated Business Taxable Income issue

Case Study • • • • •

Condo worth - $250,000 Cost basis - $150,000 Purchase price - $150,000 Donor Deduction - $100,000 Trap for the Unwary - Donor Capital Gain $60,000 – Capital Gains will be realized on only part of your total gain in the asset

• Fulfillment of Objectives

Gift Options • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Preferred Vehicle: Flip Unitrust • Net Income Unitrust – Contribute property to the trust – Distribute net income (if any) to the beneficiary – Market and sell the property – Invest trust assets following the sale

• Trust “Flips” on January 1 following property sale • Standard Unitrust – Invest trust assets – Distribute fixed percentage of the annual market value to the beneficiary

Flip Trusts Funded With Real Estate Timing Issues

Best Practices • Educate the donor about: • The mechanics of the trust • Income levels during the pre-flip period • Manage the donor’s expectations • Consider which trust provisions to include: • Define income to include post-gift capital gains • Include a make-up provision • Give the trustee discretion to allocate expenses to income or principal • Include short-term gains distributions as income

Gift Options • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Gift Annuity (Alternative to Unitrust) • Donor deeds property to charity for a gift annuity (typically deferred) • Annuity rate is usually discounted to reflect lack of liquidity and selling costs • Charity manages and sells property • Prior to sale, charity must fund payments and any required state reserve account

Why Use a Gift Annuity and not a Unitrust?

• Simpler for the donor • Higher risk for the charity • Accuracy of property evaluation and assessment of marketability is more critical • More difficult gift acceptance process • Gift annuities can be combined with life estate but these are even more risky • Is reinsurance an option?

Gift Options • • • • • •

Outright transfer Retained life estate Bargain sale Charitable remainder trust Charitable gift annuity Charitable lead trust

Real Estate and Charitable Lead Trusts • Transfer Tax Discounts – Lead Interest to Charity, Remainder Interest to Heirs – CLT Not a Tax Exempt Trust • Sales in trust taxable at trust tax rates • Can be mitigated by marketability and other discounts

• Real Estate Issue – Income Generation Required to Make Payouts to Charity

CLT with Real Estate Case Study • Donor with Trust Deeds (Mortgage Notes) – Industrial property deeds – Predictable payments from deeds – Contributed deeds to CLT for fixed time – Charitable lead payments went into donor-advised funds, two daughters are advisors.

– Daughters receive the deeds free of gift tax at the end of the CLT

Real Estate Gift Acceptance Options • Liability Concerns – Chain of Title, Environmental, Etc.

• Supporting Organization to Charity – Obeying Corporate Formalities

• Limited Liability Company – Special requirements for acknowledging gifts to SMLLC

• Two-year income only CRUT

Real Estate and Private Foundations • FAIR MARKET VALUE: Cash, Publicly Traded Stock • COST BASIS: Publicly Traded Stock Subject to Rule 144 Restriction, Closely Held Stock, Real Estate, Limited Partnership Shares/LLC Interests

• • • •

Excess Business Holdings Limits Excise Tax on Investment Income Self Dealing Problems 5% Distribution Requirement

Private Foundation Alternatives • Donor-Advised Fund – – – – –

Public Charity Sponsored Maximum Deductions Deduction Now, Advise Later Broad Grantmaking Parameters Donor Services

• Supporting Organization – Separate Corporation or Trust – Public Charity Status – Relationship to Supported Charity – Separate Entity for Holding Asset

Insurance Replacement • Donors typically have family and causes they care about • Transferring a major asset to charity, while makes sense from a tax planning perspective, still takes way from heirs • If insurable, any of the gifting options discussed could utilize insurance replacement

Insurance Replacement (cont.)

• Use a CRT and have the payments pay the life insurance premium – Does not impact donor’s budget – Income stream lasts for donor’s life

• Example – Put $1M into CRT resulting in payments of about $50k per year – Purchase life insurance with premium of $50k per year to replace as much of the $1M gifted to the CRT as possible

Questions?

Gifts of Real Estate Additional Case Studies

Case Number 1 • 70-year-old, single woman with no heirs • Active in real estate ownership throughout her life • Bought, lived in, improved, and sold duplexes and quadplexes • Now only has one quadplex remaining, fully depreciated • Many other assets (e.g., stocks, retirement plans, life insurance) • Frequently changing NPO interests and desires to support

Case 1 continued • Tools to address the different assets • Flip CRUT for last quadplex • DAF for highly appreciated stock • Transition ownership of life insurance • Ultimately all assets collapse into a single fund for perpetuity • Gives client a resource for developing charitable plan • Give advisors a means to put structure around assets

Case Number 2 • Mr. and Mrs. Wheeling wish to make a significant gift to their fund at the Community Foundation.

• They have a son to whom they would like to transfer an income producing rental property.

• He is young and they do not wish to burden him with the management of this asset at this time.

• They have good reason to expect that the value of the rental property will appreciate in the coming years, and would like to remove it from their estates so as to avoid estate tax in the future.

• They do not depend on the income from this asset.

Case Number 2 continued • The Wheelings decide that a charitable lead annuity trust may be the way to fulfill both of these objectives.

• With this plan, the Wheeling are able to ensure that: – Their fund at the Community Foundation will benefit from a stream of income for a number of years.

– When the trust terminates, the assets in the trust will pass, with no additional tax, to their son.

– The trust property has been removed from (and therefore is not taxable in) their estate.

The Outcome • The Community Foundation serves as the trustee of the CLAT. • The Wheelings transfer income producing property to the trust with no gift tax.

• The CLAT pays their fund at the Community Foundation $80,000 per year for 14 years.

• At the end of the 14 years the income producing property is distributed to the son estate tax free.

Case Number 3 • Real estate owner in large city – Multiple properties with lead paint abatement required – Several hundred stock certificates

• Create 2 CRUTs

Case Number 3 continued • Use Flip CRUT for properties – Donor begins as trustee – Completes sale, trust flips – Then, charity becomes trustee

• Use regular CRUT for stock certificates – No need for flip for these

Case Number 4 • Steve wants to give to the Community Foundation • He owns a four-plex that he built with his friend Ed in the early 1980s • Steve asks if he can contribute the property to a trust that will pay lifetime income to him and his wife Linda

Additional Facts • Steve bought Ed’s interest in the property in the late 1980s • The property is now worth $560,000 and is debt-free • Three of the four units are leased • The property needs some repairs • Ed has expressed interest in purchasing the property

Additional Facts • Steve placed the property into a flip unitrust in September 2012 • Ed’s wife was diagnosed with a terminal illness soon after the trust was funded and Ed is no longer interested in purchasing the property

The Outcome • Steve served as the initial trustee • He added $10,000 to the trust to pay for repairs • The property sold in July 2013 for $500,000 (net expenses) • Steve resigned as trustee after the sale in favor of the charity

Case Number 5 • Your client Martha is an 80- year old retired state senator • She has owned eight rental properties currently worth $2 million for many, many years • She has grown tired of dealing with the properties • Martha wants to know how she can make a gift to the Community Foundation and receive income

Additional Facts • Six of the rental properties are arts-and-crafts style homes in the local area; two are mixed usecommercial on the first floor with apartments above • Some of the properties have maintenance and tenant issues • Martha has been a client and donor for 35 years • She would like fixed income to supplement her retirement income

Gift Annuity Funded with Real Estate Estimating Net Sales Proceeds

Gift Annuity Funded with Real Estate Discounting the Gift Annuity Rate

Best Practices • Discount the annuity rate to reflect the lack of liquidity and selling costs • Do a detailed property evaluation and assessment of marketability including an analysis of environmental risks • Establish a deferred gift annuity • Identify who will be responsible for property costs before the sale • Identify dollars for gift annuity payments (and state gift annuity reserve) prior to sale • Charity can “pre-market” the property

Questions?

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National Conference on Philanthropic Planning

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Are You Prepared for the Recovery in Real Estate Gifts?

Timothy J. Prosser Kaspick & Company, LLC October 15, 2014 Real estate gifts to life income arrangements can greatly enhance the value of a planned giving program. They tend to be larger than gifts of marketable securities and can help diversify a charity’s gift flow when investment markets are faring poorly.

As real estate markets have improved over the past few years, real estate gift activity is also picking up. Now is the time for development and finance professionals to consider whether their organizations are positioned well to take advantage of prospective gifts of residential, rental, commercial and farm property. This paper discusses donor motivations for making real estate gifts, the management of risks associated with accepting, managing and selling real estate, as well as concerns surrounding real estate-funded charitable trusts, including the selection of a trustee.

Donor Motivations for Making Real Estate Gifts While the financial motivations for making life income gifts of real estate are basically the same as for making gift of other assets (i.e., avoidance of capital gains tax; income tax charitable deductions; creation of an income stream, etc.), donors often have personal motivations unique to real property. For example, an owner of rental property might no longer wish to put in the time and expense of managing it. The owner of a commercial property might find that the “right buyer” has finally come along. A would-be donor of residential property might feel that the market has now recovered sufficiently to provide an appropriate tax deduction

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for her gift. Sometimes the owner’s need or desire to move, for professional or personal reasons, can be the impetus for a gift.

In each of these scenarios, some factor outside the charity’s control has caused it to be the right time for a charitable gift of real estate. Because the impetus for a charitable gift of real property can be unpredictable and unique to each donor, it is important for charities to be prepared to take advantage of these opportunities when they arise, and to consistently get the word out that gifts of real estate are of interest.

Real Estate Values (and Real Estate Gifts) Are Improving As the following chart indicates, residential real estate values declined precipitously from their peak in 2006, bottoming out in 2011, but have been on a steady increase nationwide since that time. Farm values, by comparison, did not experience the same decline but have been on an almost uninterrupted increase for decades.

3500 3000 2500 2000 1500 1000 500 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

200 180 160 140 120 100 80 60 40 20 0

S&P/Case-Shiller U.S. National Home Price Index

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As residential real estate prices have recovered over the past three years, so have real estatefunded life income gifts to many Kaspick & Company clients:

Life Income Gifts of Real Estate ($ Millions) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

If we are in the beginning of a “recovery” in real estate-funded charitable gifts, charities should position themselves to take advantage of this situation, not just through marketing, but by putting in place (or updating) policies and procedures to help manage the risks attendant to the acceptance, management and sale of real property. Appropriate policies can help to put everyone at the charity (development, finance and legal staff) on the same page, working together to accept worthwhile gifts of real estate and to weed out the properties likely to generate problems in terms of environmental liability, marketability or cash flow.

Managing Risks Associated with Real Estate Gifts Despite their benefits, life income gifts of real estate present unique management challenges for charities. Charities accepting real estate gifts - in particular those accepting real estate to fund charitable trusts or gift annuities - should consider how best to manage the National Conference on Philanthropic Planning 2014

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marketability and cash flow risks associated with real property gifts, both before and after the gifts are made.

Managing Marketability Risk A chief concern for a charity accepting real estate is the ability to sell the property in a timely manner for a reasonable price. The gift planner should become familiar with the property prior to the gift in order to identify any unusual characteristics, such as deferred maintenance, environmental contamination, zoning restrictions, structural damage, or title problems that could affect the property’s sale. These property issues are far more easily addressed prior to the gift being made.

When marketability is a concern, it is important to discuss the sales process with the donor, and the range of outcomes he or she is willing to accept. For example, how would he or she feel about dropping the price if the property does not sell within a certain period of time? Or what about renting the property to provide liquidity for carrying costs? Properly setting expectations is critical to establishing a strong long-term relationship with the donor.

The charity trustee should conduct its own market analysis of the property prior to the gift in order to establish a reasonable listing price and to estimate as accurately as possible the length of time the property will be on the market.

The preferred gift vehicle for most gifts of real estate is a “flip” charitable remainder unitrust (flip CRUT). Prior to the sale, the trustee need only pay to the beneficiary the trust accounting income, if any. Once the property has sold and the trust has flipped to become a

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standard unitrust, the investment portfolio can be managed for total return. (Flip CRUT operation and investment is discussed in greater detail below.)

When real estate is used to fund a charitable gift annuity, the charity should obtain its own appraisal and be conservative in setting the terms of the contract. For example, some organizations accept real property to fund only deferred gift annuities to provide time to sell the property prior to the commencement of annuity payments. They also negotiate payout rates lower than the ACGA-recommended rates to help defray real estate carrying costs. It is sometimes possible for a charity to pre-negotiate the sale of donated real estate with a buyer who is “waiting in the wings.” The donor should not pre-negotiate the sale in order to avoid creating a legally binding contract prior to the gift, and thus being required to recognize the capital gain.

When using a flip CRUT, many charities ask the donor, who usually has greater familiarity with the property and strong feelings about the selling price, to serve as trustee until the property has sold. Being able to control the sale is an attractive feature for many donors. It also keeps the charity out of the property management and marketing business, and potentially avoids misunderstandings between the donor and the charity. And, it enables the charity to avoid the risk of serving as trustee of a property that could have environmental issues.

Marketability concerns are brought into even sharper focus after the gift has been made and liquidity is needed to cover ongoing carrying costs or unexpected expenses. Sometimes the charity must be patient and allow the real estate market to recover. In other situations, the charity needs to take proactive steps. Options include reducing the asking price, renting the property on an interim basis, or in particularly difficult circumstances, perhaps auctioning the property.

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In a time of weak real estate sales and increasingly tight credit markets, a charity might consider taking back a promissory note from the buyer to help close the sale. Seller financing should not be entered into lightly; a charity should carefully scrutinize the buyer’s creditworthiness before entering into such an arrangement, and consider negotiating a balloon payment in three to five years. This approach provides time for credit markets to improve, but keeps the charity from acting as lender over the long term. A charity should exercise caution in taking over trusteeship from a donor of a trust that holds a promissory note in case the promissory note defaults and the property has environmental contamination.

In anticipation of the possibility of seller financing, some charities recommend the use of flip trigger provisions in trust instruments that call for the trust to flip upon the later of the sale of the real property or the complete satisfaction of any seller financing. This avoids a scenario where standard unitrust payments must be made when a promissory note obligor is having difficulty making payments.

Managing Cash Flow Risk Real estate ownership entails maintenance, insurance, utility, administration (e.g., accounting services), and property tax costs, all of which require access to cash or other liquid assets. Anticipating cash flow needs before the gift is made is an important element of good gift planning. A charity should complete a detailed cash flow analysis, gathering information about the ongoing costs of managing the property as well as income the property will produce. The charity should review copies of any leases, taking note of expiration dates and escalation clauses.

In the case of a commercial property, reviewing financial information about any tenants is also advisable.

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Especially in difficult economic times, consider asking the donor to contribute liquid assets to the flip CRUT at the time of the gift. Some charities also ask the donor to sign a letter of understanding that, among other things, makes it clear that the donor might need to contribute additional funds in the future. The objective is to set expectations properly up front.

Not all cash flow needs can be anticipated in advance of the gift, even with the most thorough analysis. If unanticipated cash flow problems arise prior to the sale, a charity might need to consider other alternatives such as renting the property. One cash flow solution that can seem obvious, but which is actually quite problematic, is for the trust to borrow money to meet expenses. This can cause the trust to have debt-financed income for unrelated business income tax (UBIT) purposes. If the borrowing occurs in the tax year the property is sold, a portion of the realized gain on the sale could be taxed at a 100% tax rate, typically a disastrous outcome.

Neither the donor nor the charity should pay trust expenses directly, as this could be considered a loan to the trust, which could raise UBIT issues. While not an ideal solution, the charitable remainderman might consider purchasing an undivided fractional interest in the real estate from the trust in order to provide liquidity. (This is not a self-dealing transaction because the charity is a not a “disqualified person” under the tax law.) In this case, the charity should obtain an appraisal of its interest to be certain it is paying an appropriate price and will be fairly compensated when the charity joins with the trust to sell the entire parcel.

Finally, under the Revised Uniform Principal and Income Act of 1997, enacted in 42 states, trustees may establish working capital reserves for business activities held in trust and for which they maintain separate accounting records. This can, for example, allow a trustee of a trust holding agricultural or rental property to retain a reasonable amount of the income earned in a

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given tax year in the trust as a working capital reserve rather than paying it out to the income beneficiary. The reserve can then be accessed to meet liquidity needs in a subsequent tax year.

Using Real Estate to Fund a Charitable Trust A gift of real estate into a charitable remainder unitrust can help the donor avoid capital gains taxes, qualify for an income tax charitable deduction, receive lifetime income, and provide for the future of a favorite charity. Funding a trust with real estate, however, is significantly more complex than funding it with cash or marketable securities. The major steps involved in making such a gift, significant related responsibilities (for both donor and charity), and special tax rules that must be followed, are discussed below.

Before The Gift Property Due Diligence. If the donor were selling his or her property to a private individual, one would expect the buyer to go through an appropriate due diligence process. A charity will want to do the same if it is to be named as trustee of a trust holding real estate. The due diligence process typically includes an inspection of the property, a review of its title, and an investigation into its marketability. In many cases, the charity will arrange for a “Phase I audit” to ensure that there are no environmental liabilities connected with the property. If repairs or improvements are recommended to improve the property’s salability, the charity should discuss these with the donor in advance. Note that all outstanding mortgages generally must be removed prior to funding the trust in order to preserve the tax benefits associated with the gift.

Drafting the Trust Document. Many charities will provide a draft charitable remainder unitrust document and work with the donor and the donor’s attorney to be certain the document reflects the donor’s intent. While a charity’s planned giving officer can also estimate tax benefits, National Conference on Philanthropic Planning 2014

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it is very important that the donor’s own tax advisor confirm the income and transfer tax consequences of establishing the trust. The planned giving officer can also illustrate the impact of the choice of payout rate on the trust beneficiary’s income stream over time and on the value of the remainder gift to charity.

Once the document is executed and the trust funded, the trust cannot be amended except to comply with changes in the tax law. For this reason, it is important to for the trust instrument to provide the trustee with appropriate flexibility in dealing with the real estate. For example, the trustee should be given the power to allocate expenses of the trust between income and principal at the trustee’s discretion. This provision will sometimes enable the trustee to increase the income paid to the income beneficiary immediately after the real estate is sold.

Choosing a Trustee. In many cases, the charity will serve as trustee of the unitrust. It might also be desirable, however, for the donor to serve initially as trustee until the property sells. This would allow the donor to negotiate the sale of the property. If considering this option, the charity and donor should discuss carefully the duties of a trustee, as well as actions to be avoided, to help to ensure that the trust is managed properly from the beginning. (This subject is discussed in greater detail below.)

Funding the Trust. Once the trust instrument is signed, title to the property can be transferred to the trust. The donor’s attorney must prepare the actual deed. (If the charity is named as trustee, the planned giving officer should supply the formal name that should appear as grantee.) Please note that under most states’ laws, the gift to the trust is complete when the deed is delivered to the trustee. In order to avoid being taxed personally on any capital gain inherent in

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the property, it is very important that the donor not legally commit to sell the property prior to delivery and acceptance of the deed.

After the Gift Claiming the Tax Deduction. If the donor wishes to claim an income tax charitable deduction for a real estate gift in trust, he or she must obtain a “qualified appraisal” of the property not earlier than 60 days prior to the date of the gift, and not later than the due date (including extensions) of the federal income tax return on which the donor will claim the deduction. Donors, appraisers, and advisors should refer to IRS Notice 2006-26 and Treasury Regulation 1.170A-13(c) to ensure that the appraisal meets the detailed requirements of the tax law. Both the appraiser and the trustee of the unitrust must sign IRS Form 8283, which the donor must attach to his or her tax return. If the donor is serving as the intial trustee, then the donor will need to sign Form 8283 in his or her trustee capacity.

Because the donor (or others named in the trust instrument) will receive an income from the trust, an income tax charitable deduction will be allowed only for a portion of the value of the gift. The deduction for a given year is generally allowable up to 30% of the donor’s adjusted gross income. Any unused deduction can be carried over for up to five additional years. As noted above, the donor should always consult his or her tax advisor on the deductibility of charitable gifts.

Payment of Real Property Expenses. Nearly all real estate is subject to ongoing expenses such as property taxes, utilities, insurance, etc. After the property is deeded to the trust, it is the trustee’s legal responsibility to pay these expenses from trust assets. Income from the property might or might not be sufficient to cover these expenses. The charity should ask its National Conference on Philanthropic Planning 2014

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donor to agree to contribute liquid assets to the trust (either at the time of the contribution of real estate or on an as-needed basis) to pay expenses that exceed property income. Each such transfer is treated as an additional gift, providing the donor with the ability to claim an additional income tax deduction.

Please note that if the charity were to pay these expenses directly, this could be characterized as either a loan to the trust or a gift to the trust, either of which could endanger the tax benefits associated with the gift. Many charities prepare a Letter of Understanding to be signed by the donor and the charity prior to the gift. This letter outlines the specific responsibilities that the donor and the charity each have with respect to the funding of the trust and the administration of the trust until the property is sold. Payment of property expenses after the trust is funded is one of the items generally covered in such a Letter of Understanding.

Sale of the Real Property. After title to the property has been transferred to the trust, the trustee will market the property. (Responsibility for handling the sale is often spelled out in the Letter of Understanding.) If the property is sold within three years of its contribution to the trust, the trustee is required to report the sales price to the IRS on Form 8282. If the donor chooses to serve as the initial trustee, the donor will typically resign upon the sale of the property in favor of the charity as successor trustee. The charity will then perform all trustee duties for the balance of the term of the trust.

Trust Payments to Income Beneficiaries After the real property has been deeded to the trust, any income produced by the real estate (reduced by expenses chargeable to income) will be paid out of the trust as beneficiary payments to the extent it does not exceed the unitrust percentage rate. Once the real estate is National Conference on Philanthropic Planning 2014

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sold by the trustee, the net proceeds will be invested in a portfolio of financial assets. In today’s interest rate environment, the net dividends and interest from these financial assets is very often less than what is produced by rental real estate. The donor might look to the charity’s planned giving officer, when the charity is serving as trustee, to provide an estimate of the income to be paid out during the balance of the calendar year in which the property is sold. (The donor should discuss with the drafting attorney as to whether the trust instrument should allocate postcontribution capital gains as income during this period.)

Beginning on January 1 of the year after the real estate is sold, the trust will “flip” from a net income unitrust to a standard unitrust. From that point forward, trust payments will no longer be limited to dividends and interest, but will be equal to the payout rate times the net fair market value of all trust assets on the valuation date (usually the first day of the calendar year). As such, the trust should be prudently invested in an appropriately diversified portfolio intended to grow the value of the trust corpus over time.

Donors as Trustees of Real Estate Gifts Many charities prefer to serve as trustee of charitable remainder trusts established by their donors, since this arrangement allows the charity to be involved in gift-structuring decisions (i.e., to have input during the drafting of the trust instrument and regarding the funding assets); to tailor administrative and investment services to suit the needs of CRTs and their beneficiaries; and to communicate regularly with donors to help steward and build strong, long-term relationships.

When a trust is to be funded with real estate, however, some charities prefer that the donor serve as the initial trustee. As trustee, the donor (who knows the property best and might National Conference on Philanthropic Planning 2014

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have strong personal feelings about it) is empowered to oversee management of the property and sale of the real estate from the trust. Typically, after the property’s sale the donor would then resign in favor of the charity as successor trustee.

When Should the Donor Be the Initial Trustee?

There are a variety of circumstances in which the donor and/or the charity might feel that the donor should serve as initial trustee: Avoidance of Environmental Liability. Both state and federal environmental laws can require owners of real property to participate in the cost of cleaning up property contaminated with toxic substances. Depending upon the type and extent of contamination, these costs can range from a few thousand dollars to millions of dollars. If the charity agrees to serve as trustee, it enters into the chain of title and therefore opens the door to potential legal complexities and expenses, and possibly direct financial liability. Because of this risk, many institutions prefer to have the donor serve as trustee until the real property is sold.

Lack of Time for Proper Review. Occasionally, a donor will propose a new gift late in the year, wanting to complete it before year end. When real estate is the gift asset, timely completion of a proper review is difficult. A sound assessment of the property for gift acceptance purposes goes beyond an environmental review. It includes inspecting the quality of the title, ascertaining the condition of the property, identifying any needed repairs, and arranging for property and liability insurance on the property. When the donor serves as trustee, the charity does not assume the potential risks associated with a hurried or haphazard review of the property.

Lack of Institutional Expertise and Resources. Serving as trustee is a big job, and when real estate is involved, the job gets bigger. If the charity does not have the expertise to National Conference on Philanthropic Planning 2014

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review the property for gift acceptance purposes, to oversee management of real estate or negotiate its sale, it is likely not ready to serve as the initial trustee of a real estate-funded trust.

While large charities might have real estate management expertise that can be tapped elsewhere in the institution, smaller organizations often must either hire outside expertise or rely upon an informal network of alumni and friends that have the required background to help. If none of these options is available to the charity, the best alternative could be for the donor to serve as trustee until the real estate has sold.

Donor Knowledge and Desire to Control the Sale. Sometimes, the donor has a particularly strong desire to negotiate the sale of gifted real property. In such a case, the gift might not happen at all if the donor does not serve as initial trustee. Aside from the desire to be in control, sometimes the donor has intimate knowledge of the property that might make him or her uniquely qualified to manage the property and negotiate its sale. Serving as initial trustee allows the donor to utilize his or her greater familiarity with the property to manage and sell it on behalf of the trust.

Charity’s Role When the Donor is Trustee While some donors might be interested in serving as trustee, few have any desire to become involved with the details of trust administration. If the charity is going to serve as successor trustee after the sale, the charity should remain engaged to monitor the activities of the donor/trustee—from the planning of the trust, to the sale of the property, to the filing of proper trust tax returns.

Assuming this role requires a high degree of initiative and involvement from the planned giving officer. When the institution is serving as trustee, the responsibility for monitoring trust National Conference on Philanthropic Planning 2014

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activity and ensuring proper information flow usually rests with the finance or business office.

When the donor is initial trustee, it is the planned giving officer who sits at the fulcrum of the process. With alertness, advance planning, and a few well-placed words of advice, the planned giving officer can save the donor and the charity from frustrating and sometimes costly errors.

The following areas are worthy of particular attention: Pre-Arranged Sale. If the donor/soon-to-be-trustee is actively marketing the property, it is all too easy to become committed to its sale prior to deeding it to the unitrust. This can result in the disastrous outcome of the capital gain being taxed to the donor personally, while the sale proceeds are locked inside the irrevocable unitrust, unavailable for payment of the tax.

Remember the acid test for determining whether the donor has gone too far down the road toward a sale: there can be no legal obligation for the sale of the property at the time it is contributed to the trust. Determination of what constitutes a legal obligation is a matter of state law. Usually that obligation arises with the signing of a purchase-and-sale agreement, but check local law to be certain.

Improper Payment of Expenses. During the post-gift and pre-sale period, the donor/trustee will need to be careful that trust assets are not used to pay for personal expenses, a violation of the self-dealing prohibitions of IRC Section 4941. For instance, if a single check from the trust is used to pay property taxes on multiple parcels, some of which are in the unitrust and some of which are not, a self-dealing transaction has occurred and a penalty tax is due. The donor/trustee must also avoid incurring debt (e.g., to improve rental property for sale). The presence of debt could generate unrelated business taxable income, which is taxable to the trust

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at a confiscatory rate of 100%—another disastrous outcome if the sale of the property occurs in the same year.

Seller-Financing. A donor/trustee may be quick to take back a note on the sale of the property. This can create problems later on. When the charity becomes successor trustee, it may have the unpleasant fiduciary obligation to enforce the note, including re-possessing the property. Seller-financing should not be entered into lightly.

Poor Recordkeeping. The many activities associated with planning the gift—and with managing, marketing and selling the property—make it easy for the donor/trustee to let sound recordkeeping practices slip. This can create a last-minute rush to gather needed data for annual tax return preparation. It can also lead to surprises in the amount of income to be paid from the trust because of unanticipated expenses, or misunderstandings as to whether expenses will be allocated to principal or income.

Organizing for Success If it has been determined that the donor will serve as initial trustee, what steps will help ensure a positive outcome--one that maximizes the advantages of this approach and minimizes its pitfalls?

Minimum Level of Property Assessment. Even though the charity will not serve as initial trustee, it is a mistake to dispense with all reviews of the property. Future problems with the property (e.g., litigation or lack of marketability) could involve the charity as successor trustee, and might consume significant organizational resources. It is a good idea, therefore, for the charity to determine what minimum review it will perform to provisionally accept the successor trusteeship upon sale.

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A good assessment should take into account the specific nature of the property (e.g., residential property in an established neighborhood versus commercial property in an area of mixed industrial and business use). Consider using checklists of issues that can be discussed with a donor (a sample list of issues by property type is contained at the end of this paper).

Drafting Considerations. The donor should be willing to commit to resigning as trustee immediately upon the sale of the real estate. This is typically done in a separate letter of understanding rather than in the trust instrument. The trust instrument should either provide for the appointment of the charity upon the donor’s resignation (or failure to serve), or provide that the charity as remainderman will have the right to appoint anyone, including itself, as successor trustee. The latter option may serve as a further protection because it clarifies that the charity will not automatically succeed to the trusteeship if problems with the property are discovered later.

Planning for Recordkeeping. Two main options exist to provide for effective recordkeeping during the period before the sale of the real estate in a trust: In the case of income-producing real estate, a property manager might be employed. The manager typically deposits all rents and other cash receipts, pays all expenses, and sends a net amount to the donor/trustee along with a statement itemizing the income and expenses. All of this information is vital for the correct preparation of tax returns and the proper calculation of income payments to the trust beneficiary.

If the donor is personally managing the property, he or she should open a checking account in the name of the trust so that all cash receipts and expenses are run through one account. This will help prevent improper payment of expenses and also National Conference on Philanthropic Planning 2014

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provide a transactional record. The donor should also prepare quarterly schedules of cash receipts and disbursements, and keep copies of important supporting documentation such as copies of leases, tax bills, insurance binders, etc.

In summary, there are many occasions when it may prove advantageous for the donor to serve as the initial trustee of a gift of real estate, with the charity prepared to serve as successor trustee after sale of the property. Success in this approach requires a cooperative donor and a planned giving officer willing to be involved in monitoring trust activity. When the process is managed well, the result can be an excellent gift that contributes meaningfully to the charity’s mission.

Timothy J. Prosser (Kaspick & Company, LLC) tprosser@kaspick.com 314-244-5028

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ISSUES COMMON TO ALL GIFTS OF REAL ESTATE Sole ownership; joint ownership; tenancy by the entirety; tenants in common; held in a trust, Ownership partnership or corporate structure? Any restrictions on sale or transfer (e.g., rights of first refusal, Structure approvals by condominium associations or co‐operative boards, leases that terminate on transfer)?

Owner’s estimate, appraisals, realtor’s market assessment, property tax valuations etc.; are there Value/Marketability deferred maintenance issues? Will repairs enhance the marketability or can the property be appropriately sold “as is”? Are there any potential or pending assessments?

Has the property been listed with a real estate agent? Is the property under any contractual Pre‐Arranged Sale obligations to sell?

Unrelated business Are there any first or second mortgages? Other debt? When was the debt incurred? Are any related taxable income business services conducted on the property (e.g., laundry, vending machines, parking fees, (UBTI) storage fees)?

Environmental Are there any environmental issues visually detected in the site visit or other issues noted on a Phase I Issues or Phase II environmental audit review?

Donor Expectations Does the donor want the charity to hold the property until the market improves? Does the donor for Disposing of want to control the sale of the property? Are there any expectations as to how the charity/trustee will Property dispose of the property (timing, potential buyers, etc.)?

Primary Residence or

Land or Farmland Residential Rental Commercial Vacation Home EXAMPLES OF  Is the property  Is the land developed  What type of  Is the residence a ISSUES UNIQUE TO leased? Are the or undeveloped? property does the major asset of the EACH PROPERTY lessees disqualified donor own? (e.g., donor’s estate – is the  What are the plans TYPE persons (self‐ Single family home, value relative to their for the surrounding dealing)? Fixed condo, multi‐family overall estate areas – is it in “the rents or percentage home, apartment appropriate for an path of progress”? of profits (UBTI)? building) irrevocable gift?  Are there any access  Is the property held  Does the donor  What are the donor’s or easement issues in a pass‐through manage the property plans for moving out of (regarding the gift entity like a or does he or she use the residence? (“You property or adjacent partnership or LLC? a property manager? can’t live in your properties) that need Is it in a corporate unitrust!”) Does the  What is the current to be considered? structure and if so, is donor need funds from  If farmland, what tenant situation? Is it a C Corp or S Corp? the sale of the the property fully does the donor want property for living rented, length of the  If the real estate is to give, i.e. the land, expenses or an owned in a business leases, problem the crops, livestock, entrance fee into a structure, what is the tenants, etc.? machinery, etc.? retirement actual “business”  Are there any mineral  What is the dollar community? conducted? Mere amount of the gross or water rights issues  Has the donor holding of real estate rents? Amount of to be considered? discussed the gift of assets? Or is there a expenses? Net rent?  Understand the farm the residence with his trade or business  Security deposits operation (e.g., or her family – are being conducted should follow the existing tenant farmer there family  If the real estate is property into the agreements) expectations in conflict  Will the transfer of owned in a business trust with the gift? structure, is the  Need depreciation the property to a CRT  Is the vacation home business giving the schedule (and its later use) real estate (CRT must rented? Has it been  How will the affect real estate use a term of years)? depreciated (Section estimated CRT taxes?

Or is the donor giving 1250 gain)? Does the  Explore more deeply payments compare the business interest donor use a property and does the donor the donor (S‐Corp shares not manager? understand how the expectations on how allowed into a CRT)? cash flow will the farm will be sold. compare post‐gift?

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