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Friday August 19, 2022

Case of the Week

Peace in the Countryside


Several years ago, Martha and Frank built a very unique home on 45 acres of beautiful rolling hills and woods. Frank passed away three years ago and now Martha solely owns the 45-acre parcel and home.

She enjoys the peaceful country view out her front window. However, the university adjacent to the property is very interested in acquiring the property for future growth. Not surprisingly, Martha is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that eventually some planning will have to be accomplished.


How can Martha enjoy her peaceful country view, increase her income today and allow the university to acquire the property when she passes away? Another issue is that her son, Sam, would like to eventually acquire the very unique home and move it to a nearby city when Martha passes away.


This situation requires a four-part solution. First, the property is divided into the front 20-acre parcel, the five acres in the center with the lovely country home and the rear 20-acre parcel. The rear 20-acre parcel is transferred into a charitable remainder unitrust paying 6% to Martha for her lifetime. The university would purchase the property from that trust with a note paying 7%. Each year, the university makes the payments to the trust and those payments flow through to Martha. The 20-acre parcel is valued at $1 million, so Martha will receive $60,000 of income a year (plus potential growth). When Martha passes away, the note is returned to the university as the remainder beneficiary of the unitrust.

The front 20-acre parcel is sold to the university for $1 million. In addition, the university agrees not to develop the property for seven years. Since the front parcel would be the first property to be developed, this effectively limits the development of the entire property for the seven years. The university is quite willing to do this because it does not plan to use the property for ten or more years.

Third, Martha transfers the remainder interest in her home plus the five acres to the university in exchange for a gift annuity. The lovely country home plus acreage is valued at $800,000. The gift annuity for the remainder value is approximately $43,000 per year.

Fortunately, with the combination of her cost basis and use of her $250,000 home sale exclusion, this gift annuity has the same tax benefit of a cash gift annuity and over $31,000 of the annuity is tax-free.

If Martha ever decides to move into a retirement community, she and the university can accelerate the life estate agreement. The remaining value of the life income interest of Martha could be exchanged for another gift annuity or transferred to the university through an outright gift or a bargain sale.

Fourth, after the gift annuity for remainder interest has been created, Sam enters into an option agreement with the university for the purchase of the country home. It is a contingent agreement that permits Sam to purchase the home and move it to the nearby city.

Martha now has liquidity from the sale, income from the unitrust, largely tax-free income from the gift annuity and a peaceful view out her front window. The university is making payments on the gift annuity and the unitrust note but will receive title to the entire 45-acre property in the future. Finally, when Martha passes away, Sam will be able to acquire the residence at fair market cost and move it to a nearby suburban area.

Published August 13, 2021
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