Case of the Week

Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.

Karl Hendricks is age 85 and loves his home. He bought the home 20 years ago for $400,000 and it is now worth $1 million. However, Karl would like to live in his home and have additional income.

Question:

Is there a way that Karl can live in his home and still benefit from extra income today?

Solution:

An excellent option for Karl is a gift annuity for remainder in his home. Karl visited with the vice president of his favorite charity. The favorite charity has a robust pool of funds, some of which was developed over the years from other homes purchased for a gift annuity on the remainder interest. This fund makes it possible for favorite charity to assist friends and loyal donors like Karl.

Based on Karl's age of 85, the remainder value in the home is $813,836. Favorite charity will pay an annuity of $61,851.60 on this remainder value. The good news for Karl is that $49,295.73 of this payment is tax-free because he is able to allocate his $250,000 home sale exclusion to the contract value. Because he is able to increase the contract value basis by this amount, there is no gain allocated to the annuity contract.

Karl enjoyed an appreciated property charitable deduction of $478,569.80 that he will deduct over the next five years. He is receiving a very substantial income with approximately 80% tax-free payouts. Karl is enjoying his home and his new generous income and tax savings.

Editor's Note: The charity is likely to pay about $400,000 to $500,000 in annuity payments and, after Karl passes away, sell the home for an estimated $1.3 million factoring in appreciation. The charity's CFO considers this plan a good return on investment.