Tax Benefits Stay with Life Estate Owner

Will your taxes change if you make a gift of real estate subject to a life estate over a straight gift of real estate? Guest blogger  Stacey Crowell Maiden, Esq., Of Counsel to our Trusts and Estates and Elder Law Practice Group provides an explanation of this common, but non-intuitive planning technique.

In our estate planning and elder law practice, we sometimes incorporate the use of a “Life Estate Deed” to transfer real property.. Under a Life Estate Deed, the “life tenant” retains 100% of the present interest of the property. The future interest (which is defined as the full interest after your death) would be transferred to the “remainder persons.” When retaining a Life Estate in the property, you are not transferring or giving the entire interest in the property away. Instead, the remainder persons are given today the right to own the property after you pass away.

The life tenant is responsible for the payment of real estate taxes on the property. However, the Municipal Tax Office - on receiving a copy of the recorded Life Estate Deed from the County Clerk – will update its records, listing the remainder persons as the owners, which means the tax bills are then sent in the names of the remainder persons. This can be a source of confusion and concern for our clients, particularly as to whether they will lose any tax benefits related to ownership.

Guidance is found in the Internal Revenue Code and Regulations, New Jersey Statutes and the New Jersey Administrative Code to assure our clients that as life tenants, they continue to receive certain tax benefits provided to owners in New Jersey.

For example, life tenants retain the Income Tax Deduction for Real Estate Taxes. As the owner of the property by virtue of the life estate, a life tenant may continue to deduct the real estate taxes he pays on his federal income tax return. (I.R.C. §164(a); Reg. §1.164-1(a).

And, by reserving a Life Estate and paying the real estate taxes, the life tenant is entitled to continue to receive the New Jersey Homestead/New Jersey Saver Rebate (N.J.S.A. 54:4-8.58; 54:4-8.58a; 54:8.59); the Senior Citizen's Deduction (N.J.A.C. 18:14-1.1 and N.J.A.C. 18:14-2.8); and the Veteran's Deduction (N.J.A.C. 18:27-2.10).

Of course, there are other potential taxes (e.g. capital gains taxes) to be concerned with when transferring property pursuant to a Life Estate Deed, but the above tax benefits related to present ownership of the property remain in place for a life tenant who pays the real estate taxes.

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Charities as Victims of Cash for Clunkers?

Are Charities going to be Victims of Cash for Clunkers asks Kay Bell of Don't Mess With Taxes.

The Cash for Clunkers program (officially CARS for  Car Allowance Rebate System ) has been hugely popular. Old gas guzzlers are being traded in for new cars that have a $4500 rebate.  An additional $2 billion was added to the program last week.

Quick Aside - $2 billion is the same as $2,000,000,000.00 - ALWAYS write out the zeros when talking about how the government is spending YOUR dollars - looks quite a bit larger now, doesn't it?  At $4500 a car, that is 44,444 additional new cars being purchased.

The program requires that the "Clunkers" are junked by having liquid silicate poured into the engine, so that it is irreparably destroyed.  These cars will then be sold for scrap (and I won't go into the pros and cons of the environmental effects of that).

The problem?  Many charities rely on donations of old cars as an ongoing revenue source.  For example, Bell says:

Animal Services of Thurston County, Wash., depends on up to $20,000 in donations each year from Northwest Charity Donation Service. The service, in turn, relies on donated cars.

But since the Cash for Clunkers program began this summer, the nonprofit's source of funding is drying up, reports King 5 News in Seattle.

These are the same charities that have already lost scores of other funding sources as a result of individuals reducing contribution due to the stock market drop, corporations redlining excesses in the budgets due to the recession, and foundations staggering under market and Madoff type unanticipated losses.  So, score 1 for the car industry, and another negative for the charities that are using private dollars to address some of the staggering needs of the less fortunate.