What Accounts for Increased Real Estate Activity?

November, 2017
By Dennis Bidwell

I believe that increases in real estate gift activity can be explained by several factors.

I think more non-profits have opened their doors to real estate gifts, in many cases actively marketing their interest in real estate gifts, because long-standing resistance to real estate gifts has been fading away. Why the more open attitude in these non-profits? It’s in part due to a recognition that there are accepted and proven best practices for real estate gift acceptance policies and procedures. I think it’s also due to the fact that more attention at professional conferences, and in journals, and on list serves, is being devoted to real estate gifts.

Another factor, at least at some institutions, is that key personnel who embodied an organization’s cautious attitudes toward real estate – perhaps a chief financial officer, or a general counsel – have retired or otherwise moved on. In many organizations there is the lore of the “horror story” real estate gift – the property with uninvestigated underground fuel tanks, the property with a distant cousin still owning a one-eight interest, etc. – that has formed the basis of turning away from real estate gift possibilities. Quite often I’ve seen attachment to that lore dissipate with the change of personnel over time.

And then there’s the simple fact that as organizations see their peer institutions raising substantial funds through real estate gifts, they begin to ask why their institution is leaving dollars on the table by not accepting real estate gifts.

I’ve also seen that more and more non-profits, as they contemplate the next large capital campaign, realize that next time around they’ll need to be going back to their donors armed with some different kinds of asks, and often at the top of that list is real estate.

Yet another ingredient in the changing attitude toward real estate gifts is that more non-profits are better understanding the motivation of real estate donors, and are doing a better of job marketing to those motivations. Specifically, as it’s understood that many owners of multiple properties are attracted to the prospect of unburdening themselves of the hassles and expense of continued property ownership, and turning the marketing process over to someone else. Marketing efforts that recognize this motivation – in addition to the tax benefits of real estate giving – can be quite successful.

And underlying all of this is the increasingly understood fact that the largest single category of household wealth in the United States – larger than retirement funds, larger than stocks and bonds held outside retirement funds, much larger than cash – is real estate. Though different data sets yield somewhat different conclusions, by most accountings private real estate wealth accounts for 35% to 40% of household wealth in the United States. (Cash and cash equivalents? About 15%)

Taken together, I think these various factors will continue to have more and more development operations opening their doors to real estate gifts, knowing that accepted due diligence practices and reasonable gift minimums will screen out the problematic gifts and allow focus on the truly promising real estate gift opportunities.

Ethics of Engaging Seniors About Possible Real Estate Gifts

By Dennis Bidwell
August, 2017

Here, drawing on some of the suggestions in that document, is an approach that has worked for me and my clients and, I believe, has served well the interests of many donors and their families.

1. Nothing is more important than keeping in mind the best interests of your donor prospect’s present and future needs, as best you can determine them. This can mean putting the brakes on when an enthusiastic donor wants to give away more than appears good for them. Some years back I was working with a hospital in conversation with a retired nurse who was devoted to this organization, for whom she had worked her entire career. She wanted to give her home to the hospital, retaining a life estate. The problem was that she didn’t have much in the way of other assets, and she might have risked impoverishing herself should health challenges come her way in the years ahead. We expressed great appreciation for her extraordinarily charitable impulse, but recommended that she instead leave the house to the hospital in her will, leaving her options open.

2. It’s also important to keep in mind that one of the donor’s needs may very well be to feel good about the charitable legacy they leave behind. Indeed, I think the most satisfactory element of my work is helping people to realize that they sometimes have, through their real estate assets, charitable capacity way beyond what they thought possible. In doing so, extraordinary gifts sometimes result – gifts that leave the donor proud and satisfied beyond measure.

3. Always take time to probe to learn the donor prospect’s full set of objectives. Too often gift planners start a conversation with a donor prospect with a particular gift structure in mind. It’s almost always better to start by seeking to understand a donor’s complete situation – their income objectives, their tax planning objectives, their wishes regarding various pieces of real estate, their life-style wishes, their desires toward their children and other heirs, the variety of charities they wish to help. From this will come a variety of gift proposals aimed at meeting their particular objectives. The proposals are likely to be much better received when grounded in the prospect’s stated intentions.

4. Always urge your donor prospects to seek professional input from financial and legal advisors. But think carefully about the right time for donors to seek this input. I have worked with many gift officer clients to present a menu of interesting and appropriate real estate possibilities for the prospect to consider Sometimes the intrigued donor has immediately referred these possibilities to their attorney or other advisor, who has dismissed them out of hand as unconventional or untested. (Sometimes this means the advisor is personally unfamiliar with the recommended approach.) I have found it often works better to spend time with the donor, and family members, letting them arrive at their own understanding of the proposed arrangement, and only later in the process — when they are comfortable with a particular gift structure — turn to their professional advisors. At that point the advisor will of course feel compelled to caution them if they really see undue risk, but hopefully they’ll see their role more as implementing a viable strategy than finding reasons to say no.

5. Encourage the involvement of family members. This is trickier than it seems. Especially with real estate that’s been in the family and has acquired emotional attachments. Sometimes parents are very clear-headed about their desire to dispose of a piece of real estate knowing full well that would not be their children’s preference. Sometimes parents, well-advised by counsel, want to treat one child very differently than another. Which is to say that the involvement of children, or brothers and sisters, in the discussion or property disposition may or may not be appropriate. Like many other matters, this is where good judgment, aided by the advice of experienced colleagues, is essential.

6. Other guidelines. I have seen in the Santa Fe document and elsewhere a number of practices that seem important and reasonable:

a. Ask potential donors if there is anyone else they’d like to join them in a meeting with you.
b. Ask if the potential donor has an executed durable power of attorney. If so, include that person in discussions where feasible.
c. Always emphasize that no immediate decision is necessary.
d. If there is any reason to question the mental capacity of the potential donor, be sure that one of the donor’s professional advisors and/or a trusted family member is present for discussions.
e. It is important to promptly provide a written summary of discussions that have taken place, and to encourage the donor prospect to share this with others where appropriate (keeping in mind the caution of item #4 above.)

These are almost always somewhat tricky situations. It’s not appropriate or ethical for the charity’s representative to come on too aggressively or with too specific of a proposal early in the conversation with the prospect. On the other hand, it’s not the job of the charity’s representative to be so cautious and timid, out of fear of appearing pushy, that they withhold from the donor prospect creative and appropriate ideas that might unlock charitable potential in ways fulfilling to donor and charity both. Experience and judgment, and adherence to a common sense code of ethics, will reveal a middle path.

In Arranging a Real Estate Gift, Use All the Tools at Your Disposal

By Dennis Bidwell
May 2017

Sometimes I’ll read an article on real estate gifts that suggests only one workable gift structure involving real estate – a charitable remainder trust, or perhaps making the gift by bequest, or maybe a bargain sale. I also see from time to time conference presentations that emphasize just one gift type.

These single-solution approaches trouble me. They are often presented by someone representing a financial firm that makes their money by managing and investing CRTs, or by a law firm looking to build its estate planning practice, or by a third party looking to profit on bargain sale transactions.

These presentations may be good marketing opportunities for the organizations or firms involved, but they do not represent in my view what should be considered best practices in real estate gift planning. I believe such presentations promote one-size-fits-all solutions, skipping over the importance of first understanding the nature of the problem to be solved.

I consider it the responsibility of those of us in the gift planning arena – whether representing individual charities, law firms, consulting practices or financial firms – to devise gift structures that best address the facts and circumstances of the prospective donor, consistent with the policies of the prospective donee charity.

I have seen charitable remainder trusts proposed where the donor never expressed any interest in receiving payments in exchange for their gift. (It turns out they would have been totally content with an outright gift.) I have seen a property-funded charitable gift annuity proposed when the donor would actually have preferred receiving a lump sum of cash that they would invest themselves. (In other words, a bargain sale or a fractional interest gift would have been a simpler and more appropriate solution.) I have seen bequests involving property encouraged without giving any consideration to the advantages of a retained life estate arrangement instead. I have seen a bargain sale proposed when essentially the same thing could be accomplished (without requiring upfront purchase funds from the non-profit) with a fractional interest gift.

I have found that a little gentle probing about what the donor’s objectives are in considering the gift will generally reveal the parameters within which the gift should be structured. How important is avoiding or minimizing capital gains tax? Do they want some cash back, or are they in position to make an outright gift? How much are they motivated by simply unburdening themselves of the property and turning over to someone else the responsibility for selling it? If they want cash back, would they prefer it as a lump sum or as a stream of payments? How important is an income tax deduction? Do they have the capacity to soak up such a deduction? Are they hoping to continue living in/using the property?

Careful listening, stimulated by a few guiding conversational questions, should be the starting point in devising a real estate gift solution that is tailor made to fit the circumstances of the donor and their property, while fitting within the gift policy constraints of the recipient organization.

Please let me know if you’d like me to send you a one-page guide to asking the key questions and gathering the essential information in such an exploratory conversation with a would-be real estate donor.

There are lots of tools available for use by the gift planner dealing with a real estate situation. There’s no excuse for not using all of them, where appropriate. Starting with an assumed solution in mind seldom serves the interests of either the donor or the charity.

The Retained Life Estate – An Underutilized Gift Arrangement

By Dennis Bidwell
February 2017

As development offices in non-profits of all sizes and shapes turn greater attention to attracting, closing and selling real estate gifts, I’m finding more and more charities are particular interested in exploring retained life estate possibilities with their donors.

The basics:

  • The owner(s) of a personal residence or agricultural property can donate that property to charity, retaining the right to use the property for the rest of their lives (or for a fixed period of time.) This is known variably as a retained life estate, a reserved life estate, donating the remainder interest in the property, or retaining a life tenancy in the property.
  • Though title in the property changes hands, the “life tenants” retain full use and control of the property, with full responsibility for taxes, utilities, maintenance, etc.
    • A clear and detailed written agreement is essential to spell out all the responsibilities and rights in such situations, including dealing with incapacity, vacating the property, etc.
  • Despite continuing to live in or use the property, the donor is entitled to a charitable tax deduction in the year of the gift that is based on the appraised value of the property (adjusted for their life expectancy), the applicable IRS discount rate, and other factors.

Charitable deduction potential

As an indication of the extent of the possible deduction for making a property gift subject to a retained life estate, the following table shows approximate deduction percentages as a function of age (and assuming a discount rate of 1.8%). For example, a 76 year-old donating a $1,000,000 property, subject to a retained life estate, could anticipate a possible charitable tax deduction of approximately $740,000. (As in the case of other property gifts held for more than one year, the maximum charitable deduction in any given year is 30% of adjusted gross income, but with the ability to carry forward any unused deduction for up to five additional years.)

Single Life % Joint Lives %
56 49% 56, 54 38%
66 62% 66, 64 51%
76 74% 76, 74 65%
86 85% 86, 84 78%
96 92% 96, 94 88%

[Note: As interest rates rise, the deductions available for retained life estate gifts decline.]

Comparison with a bequest of the property

Whenever a client tells me of a donor whose bequest intention suggests that a residential or farm property will be coming to the non-profit through the estate, my advice is that they should schedule a visit soon to that donor in order to review the benefits of donating the property in question now, and retaining a life estate. Chances are that the property owner is not aware that they could accomplish their aim – having the property pass to the charity for sale after their death – through a retained life estate gift, rather than by bequest. They’re probably also not aware of the several major advantages to making the gift during one’s lifetime, principal among them being the tax deduction available when making the gift now, rather than at death. And there’s also the benefit (for some) of being recognized now for one’s generous gift, as opposed to recognition after death.

Those of us in the gift planning business cannot assume that a donor in such a situation will be aware of the retained life estate alternative through their attorney or accountant of financial planner. It rarely works that way. Rather, it generally falls to us, as gift planners representing non-profit organizations, to explain the whole menu of options for disposing of real estate, including the retained life estate.

Here’s a comparison of leaving a property by bequest vs. leaving it now and retaining a life estate:

It’s not for every situation

A critical difference between donating the property now while retaining a life estate, as opposed to leaving the property through one’s will, is that the retained life estate arrangement is irrevocable (thus making available a charitable tax deduction.) One can always change one’s will. Not so with a retained life estate. Which means that anyone considering such a gift arrangement should think very carefully about it and seek expert professional advice. It also means that those of us who are gift planners should be aware that this is a gift arrangement only suitable for donors with sufficient financial resources to get through their retirement years without needing the real estate in question.

Attracting Real Estate Gifts – What Works

By Dennis Bidwell
July, 2016

It is clear to me that the likelihood of a non-profit receiving desirable real estate gifts (properties that are marketable, free of environmental and title problems, and with net value of at least $100,000) increases as the organization puts more effort in to marketing and outreach efforts. Conversely, non-profits that do little or nothing in the way of marketing their interest in real estate gifts tend to receive the occasional real estate inquiry, but it is often a “bad” piece of real estate that is offered (questionable marketability, title defects or environmental issues, likely net value way less than $100,000).
graph sept 2015

 

More and more I am seeing really significant real estate gifts come about because the institution reaches out to older individuals and couples who are at a point in their lives where they must make decisions about disposing of a vacation home or other property. Such property owners are sometimes quite intrigued at the gifting possibility when reminded – through the right marketing materials or in a conversation with a development officer — that they have considerable charitable capacity in their real estate, that a large number of charitable options are available to them, and that substantial tax advantages can accompany such gifts.

The graphic above, which I have shared with my readers before, tells the story:

Twenty-five years of experience helping non-profits attract, structure and dispose of real estate gifts tells me that when an organization doesn’t market its interest in real estate gifts, and doesn’t initiate conversations with donors about their real estate holdings, the organization is likely to receive only the occasional, haphazard inquiry about a piece of property. Very often, but not always, the property offered will be problematic in one way or the other – it’s an unmarketable time share, or a property with very little equity value once the mortgage has been paid, or a property with access issues, or a property with a complicated family ownership story, or a property with some sort of environmental complication.

Often, organizations that have been offered such gifts over time come to the conclusion that all real estate offered as gifts must be similarly problematic.

We all know of many organizations with a history of having accepted one or more of these “bad” real estate gifts, way back when, which has left behind the lore that real estate gifts are bad.

But hundreds of non-profit organizations are accepting many high quality real estate gifts every year. To a large extent the organizations receiving these gifts are the organizations that make these gifts happen through their marketing and outreach efforts.

Several years ago, I worked with the Partnership for Philanthropic Planning to conduct a survey of its members nationwide regarding real estate gifts. Thirteen percent of the organizations responding reported that 10% or more of their gifts in the last three years, measured in dollars, had come from real estate gifts.
Among these organizations reporting a high volume of real estate gifts, these are the percentages that rated various marketing and outreach approaches either “very effective” or “somewhat effective”:

graph 2 sept 2015

 

 

 

 

 

 

 

The conclusion? Real estate gift activity – particularly opportunities to close “good” real estate gifts — increases with the intensity and type of marketing and outreach effort undertaken.

The single most effective approach? Identifying prospects who fit the profile of a likely real estate donor (typically involving people over 65 owning multiple properties, geographically dispersed), and then initiating a conversation with them about their real estate holdings and their plans.

Screening out the “Bad” Gifts

Because marketing and outreach efforts have been shown to increase the number of properties being offered as gifts, it becomes very important that a development office is adept at quickly screening out the “bad” gifts, in order to devote scarce resources to the truly promising gifts. Fortunately, there are proven ways to quickly identify – and tactfully decline – the “bad” gift, while working in a donor-friendly way with the “good” properties offered.

More about this in a future article.

 

The Fractional Interest Donation, and When to Use It

by Dennis Bidwell
April, 2016

I’ve previously written about bargain sales – appropriate for situations where a property owner is ready to dispose of a property, has charitable desires, but isn’t in position to give the entire property away. By selling the property to a non-profit at a discounted price, the property owner gets cash from the sale and a tax deduction for the difference between the appraised value of the property and the sales price. The non-profit, in this situation, pays cash for the property, and then sells it, presumably at a price in the vicinity of appraised value. For the non-profit, the difference between what it paid and what it realizes on sale is the net gift amount.

There’s one big problem in this scenario for many non-profits, however – and that’s coming up with the cash for the initial purchase.

A solution to this – an approach that is not used by non-profits with the frequency it should be, in my opinion – is to work with the donor on a gift of a fractional interest in the property. (This is sometimes referred to as donating an undivided interest.)

Here’s how it works, in the case of a property with a value of $1,000,000, where the property owner was contemplating selling the property to a non-profit at the bargain sale price of $250,000. (Representing a potential gift to the non-profit, more or less, of $750,000.)

In the comparable fractional interest donation scenario the property owner would donate a 75% undivided interest in the property to the charity, generating a charitable tax deduction for doing so. (More on tax treatments later.) The charity and the donor would then, as co-owners, jointly market the property. (In some cases the donor would be delighted to let the non-profit assume the lead role in marketing. In other cases, the donor may want to stay very much involved. Either way, both owners sign the listing agreement.) When a buyer is found, a purchase agreement is executed by the parties and at closing the donor and the charity emerges with their respective portions of the net sales proceeds. In our hypothetical case, let’s say the property sold for $1,000,000, for a net (after broker fee, legal, closing costs) of $920,000. The donor’s 25% would be $230,000, with the charity netting $690,000 in cash.

Similar results for donor and charity

In both cases – bargain sale and fractional interest gift – the property owner receives about 25% of the value of the property in cash, generates a charitable tax deduction for the gift portion of the transaction, and is potentially exposed to capital gains tax on the sales portion of the transaction. Also in both cases, the charity will proceed only if its due diligence investigations – title, environmental, marketability – reveal no problems with the property.

But there are differences, pro and con, for both the donor and the charity.

For the charity, the big advantage is that in a fractional interest donation the charity is not required to find the cash for an initial purchase. Also, between the time of the gift and time the property sells, the responsibility for carrying costs (property taxes, utilities, maintenance, etc.) is shared proportionally among the parties. (Hopefully, the donor will agree to cover 100% of these costs.)

A potential downside for the charity is that it may not be in total control of the marketing process, as both parties presumably need to agree on the listing agent and the sales price. Often, however, as mentioned, the donor is more than happy to be a fairly passive participant, involved only when documents needs to be signed.

(The charity would only accept this sort of gift if it had a firm agreement with the donor about marketing the property. Ownership of a 75% undivided interest, absent an agreement with the other owner to market the property, would never be desirable.)

For the donor, a major difference in the fractional interest gift scenario is that they share in the marketing risk with the non-profit. Unlike the bargain sale situation where they receive their purchase price and are out of the deal, with a fractional interest situation they don’t receive payment until the property sells, and the property could of course sell at a lower or higher price than the donor originally thought likely. And, of course, the donor will continue to be responsible for their proportional share of carrying costs until the sale.

Tax treatments

In terms of charitable tax deductions, the outcomes for the donor in the two scenarios are similar but via a different path. The charitable deduction available to the donor in the case of the bargain sale imagined above would be $750,000, assuming a qualified appraisal establishes a fair market value of $1,000,000. The deduction is triggered at the closing on the sale. In the case of a fractional interest donation, the starting point would also be an appraisal, but technically the appraiser is valuing a 75% undivided interest in the property. It’s possible that the appraiser would apply a partial interest discount to the valuation (reflecting the impact on marketability of an interest less than 100%), resulting in a valuation, and thus a potential charitable deduction, somewhat less than $750,000. Here, the deduction is triggered by the conveyance of the property interest.

In both cases the charitable donation deduction flows from the donor’s appraisal, and is not affected in any way by the eventual sales price for the property, regardless of whether that price is higher than, lower than, or the same as the appraised value.

In either case, of course, the donor would be limited to a charitable deduction no greater than 30% of adjusted gross income in the year of the gift, with an ability to carry forward unused deductions for up to 5 additional years.

Sometimes, the donation generated by the fractional interest gift can largely, or perhaps totally, shield the capital gains exposure from the sales component of the transaction.

Applicability

Where is this scenario most likely to be of use? In my experience, whenever a charitably-minded property owner is preparing to sell a vacation home they’re no longer using, or “downsizing” from a current home, or disposing of a commercial property, they should be made aware that there’s a simple way to incorporate a meaningful charitable gift into the real estate transaction. Sometimes, when preparing to dispose of a property, the owners realize the property has appreciated a great deal, providing them the ability to make a meaningful gift while retaining a substantial amount of equity.

Other times, it’s appropriate to introduce the fractional interest gift when a bargain sale is proposed, but the charity is not in position to find the upfront investment dollars necessary for such a transaction.

A hybrid

Sometimes a donor will be willing to give the fractional interest donation scenario a try, but will want certainty that at some date certain they will get the cash they are looking for. This could be accomplished by having the donor initially donate a fractional interest, but to backstop this with an agreement with the donor that if the property has not sold by a certain date, then at that time the charity would buy out the donor’s remaining interest at an agreed price. This would effectively convert the fractional interest scenario in to a bargain sale.

Three Reasons to Engage Your Board of Directors About Real Estate Gifts

By Dennis Bidwell

February 2016

As I work with non-profits around the country, helping them attract and structure charitable gifts of real estate, I am finding more and more of them choosing to engage their board of directors in the real estate gift process. Here’s why.

First, a very large majority of real estate donors fit this profile: people over 65 years of age who own multiple properties (generally residential), often scattered geographically, whose children (if they have any) are otherwise taken care of in their estate planning, and who have a charitable interest in the institution. (See this article for more on this.) In my experience, that’s not a bad description for many a trustee at a college or university or hospital or museum, etc. For this reason, I’m seeing presentations made at board meetings, or at development committee or campaign committee meetings, simply because that’s where some of the very best prospects for such gifts are gathered in one place. At such meetings I’ve sometimes been asked to present a hypothetical case study whose fact pattern was eerily similar to the circumstances of a particular board member in attendance. Furthermore, once such a board member (or former board member, or advisory committee member, or long-time close friend of the institution) recognizes the reasons for gifting, rather than selling their unused vacation home, they often are more than happy to have their gift experience broadcast far and wide as an example of giving real estate.

Planned giving pioneer John Brown was fond of saying: “At the table of every Board meeting sits at least one potential real estate gift. It’s just that no one has ever connected the dots.”

Second, board members and other close friends of an organization often travel in circles where they’ll encounter people contemplating disposing of an unused second home, or an investment property. When a trustee of your organization, in a cocktail party conversation, learns that his or her friend is, say, getting ready to put their Nantucket home on the market, it’s important that at that moment they suggest that rather than immediately listing the property, would they mind a brief conversation with someone in the development office about a more tax-advantageous way of parting with the property that would also provide enormous benefit to the institution? The trustee need not be an expert on the tax treatment of various giving vehicles. But it is important that they recognize an opportunity staring them in the face and be ready to suggest a friendly next step.

And finally, successfully incorporating real estate gifts into an organization’s development program depends on institution-wide buy-in. It’s important that revised gift acceptance policies (see article here on gift acceptance policies for real estate gifts) that incorporate best practices regarding real estate gifts be run past the board not just for purposes of pro forma approval, but also because board members need to understand the magnitude of the real estate opportunity and why the organization has decided to pursue real estate gifts. Also, should there be resistance to real estate gifts in, say, the finance office or the office of the general counsel, it’s important that those offices understand that the Board of Directors has endorsed the initiative.

Case Study: Gift of Texas Ranch Subject to Retained Life Estate

By Dennis Bidwell
December, 2015

Take-aways from this gift scenario:

1. A retained life estate gift can accomplish essentially the same charitable results as leaving a property by bequest, with two important exceptions: the owners are entitled to a current income tax deduction when they donate the property subject to a retained life estate (unlike a gift by bequest); and the donors can enjoy the satisfaction, and praise, for making the gift in their lifetimes, rather than such recognition coming posthumously.

2. In the case of a property gift likely to generate a very large tax deduction, the donor can make fractional interest gifts over time, thus spreading out their tax deductions over sufficient time to enable use of such large tax deductions.

3. The non-profit recipient of the gift, based in Virginia, was able to assemble a team of experts to structure and close this gift in Texas. Such expertise had its cost, but was well worth it in relation to the ultimate value of the gift.

George and Jennifer Jackson were owners of a 150-acre ranch in Karnes County, Texas, that they used on the weekends and as a base of operations for their frequent birding expeditions. Their primary residence was on the outskirts of San Antonio.

The Jacksons were long-time members of the National Wildlife Federation, based in Virginia, as well as other conservation organizations. They had no children and had decided some years ago that they would leave their ranch by bequest to a conservation organization. When they became acquainted with the option of donating property during one’s lifetime, while retaining rights to continue using the property by way of a retained life estate, they contacted NWF and other organizations to find out who might be interested in working with them on such a gift.

The Jacksons decided to make their gift to NWF because of the good work of NWF, but also because of NWF’s access to the sort of expertise necessary to complete a gift of this sort within a reasonable period of time.

Discussions with the Jacksons involved a mineral rights lease on their property (which was likely to become quite profitable in the years ahead) and their desire to spread out their tax deductions over time in order to take maximum advantage of those tax benefits. (Donors can take charitable tax deductions up to 30% of adjusted gross income in the year of the gift, with unused deductions rolling over for up to five additional years.)

Along the way, NWF’s due diligence included a title search, an environmental assessment, consultation with knowledgeable local realtors, and careful review of the mineral rights lease. The Jacksons, before finalizing their gift, worked with NWF, their accountants and their appraiser to estimate the tax deductions that their gift might trigger. The parties also worked diligently on the details of a life estate agreement that spelled out, among other things, the responsibilities of the parties for property taxes, utilities, repairs and maintenance, etc. during the time of the life tenancy. This agreement also made it clear that the Jacksons would have sole claim to any mineral rights lease payments made while they continued to use the property.

In the end, the Jackson’s donated a 50% undivided interest in the ranch (including its mineral rights, subject to lease) to NWF, subject to a retained life estate. They also signed a document pledging the donation of the remaining 50% interest (also subject to a retained life estate) six years later. This arrangement allowed them to spread out their tax deductions for a period of up to twelve years (because they didn’t have sufficient likely adjusted gross income to use their deductions in six years or fewer), but it also provided NWF with the assurance that it would at some point have 100% ownership of the property, putting NWF in position, at some point after the Jacksons had died (or relinquished their life estates), to market the property.

The gift closed prior to year-end, which met the Jackson’s tax planning objectives. When they filed their taxes the following April, they were able to claim a very substantial deduction, in anticipation of continued deductions in the following five carry-forward years. After those carry-forward years, they expected to proceed with the donation of the remaining 50% undivided interest in the property.

Is It Time to Revise Your Gift Acceptance Policies?

By Dennis Bidwell
December, 2015

In my experience there is often someone or some office in a non-profit organization—perhaps the CFO, maybe the general counsel’s office—that is exceedingly cautious about accepting real estate gifts. Often this is due to a bad experience from 20 years ago, such as the now legendary story of the gift of the former gas station owned by three warring siblings.

My response is that those of us who have worked with real estate gifts for decades—and there are many of us at this point—have figured out a pretty good way to open the doors wide to potential real estate gifts, while at the same time putting in place rigorous—but donor friendly—screening and due diligence procedures. The result is that only the promising and generally non-problematic gifts make it through the process, while the bad gift potentials get discarded early on, with a minimum of donor disappointment.

This approach starts with clear gift acceptance policies and procedures that adopt best practices for screening and receiving real estate gifts in various forms. And then it proceeds to a two-stage screening and due diligence process.

Gift acceptance policies

State of the art real estate gift acceptance policies these days specify whether, and under what conditions, various real estate gift types are acceptable (outright, bargain sale, charitable gift annuity, charitable remainder trust, retained life estate, fractional interest) and what gift minimums apply in each case. (With the understanding that allowance always need be made for exceptions.) These policies also tend to clarify the “who does what” within the institution—screening, due diligence coordination, gift approval, handling closings, coordinating property disposition, etc. Better to have all of this thought through in advance than to be left scrambling while an impatient donor prospect feels put off for weeks and months on end.

A two-stage screening and due diligence process

The aim of the first stage of a screening and due diligence process is to gather essential information about the property, the donor prospect, and the proposed gift structure as rapidly as possible in order to provide the prospect with a prompt indication of whether or not your institution wants to pursue the gift. Providing such an answer quickly not only avoids wasting a great deal of time and effort on the part of the donor prospect, but also assures that your institution’s staff is spending its time on the truly promising gifts.

[Contact me if you’d like a one page set of essential questions that will allow you to efficiently gather the essential information needed to decide if you want to pursue the potential real estate gift further.]

For potential gifts that pass such an initial screen, a period of due diligence then follows. It is generally at this point—and not sooner—that the donor prospect is asked to provide much more extensive information—sometimes the right questionnaire at this stage of the process is helpful—and documentation about their property and their financial situation.

The key elements in a due diligence process designed to identify, manage, and minimize risks generally consist of the following:

  1. title investigation with the assistance of a local real estate attorney;
  2. a Phase I environmental assessment, with follow-up as needed;
  3. an independent assessment of local market conditions and the property’s market value (usually stopping short of a full-blown qualified appraisal);
  4. a building inspection (if appropriate), along with a personal visit by a representative of the institution.

Moreover, non-profits are recognizing that in order to be in control of the due diligence process, as well as to be more “donor friendly,” it makes good business sense to assume the costs of these investigations, rather than ask the donor to do so.

I am convinced that the key to increasing the quantity and quality of real estate gifts is, first, to broadcast an institution’s interest in accepting real estate gifts in various ways, and then to work the prospective donor in a two-phase process that initially screens out/in in a donor-friendly way, saving the more burdensome parts—providing documents, completing questionnaires, allowing people on the property for inspections—until a later stage when it’s fairly clear that this indeed a promising gift.

What is the Profile of a Likely Real Estate Donor?

By Dennis Bidwell
October, 2015

Based on survey results and years of collective experience of those of us who are practitioners in the real estate gift field, it is possible to describe the profile of the individual or couple who make substantial gifts of real estate. I venture to say that at least 80% of real estate donors fit this pattern:

  • Age 65 and older
  • They own multiple pieces of real estate, typically in multiple states
    • The more geographically dispersed the properties, and the more jurisdictions with which they are dealing (property taxes, income taxes…), the more likely they are to be a real estate donor
    • The gift property is only occasionally one’s primary residence. It’s much more likely to be a vacation home or an investment property.
  • The property being considered for gifting is usually appreciated in value
  • Ownership and management of one or more of their properties is becoming more burdensome than it is enjoyable.
    • Opening and closing the property every year, paying increasing property taxes, worrying about future roof replacements – the cumulative effect of this causes many second home owners to decide to dispose of their property, one way or the other
  • They either have no heirs, or their children are otherwise provided for in their estate planning
    • Typically, if there are children, they have moved away and are no longer using, for example, the family summer home on the coast
  • They have the capacity to use a considerable income tax deduction.
    • Often this is not just because of their normal adjusted gross income but also because of a pending sale of a family business, or of another appreciated property, thus triggering large gains in search of deductions.
  • They have charitable motivation

And here are other situations that often lead the property owner to consider making a gift of real estate:

  • They are wary of marketing the property themselves, and having to face the emotionally-troubling reality that their property is now worth, say, “only” $850,000, as opposed to its value of $1.2 million a few years ago.
  • They may want to supplement their retirement income by converting a “non-performing” real estate asset (i.e., an asset generating no income) into income, either through a Charitable Remainder Trust or a Charitable Gift Annuity.
  • They may want to resolve, once and for all, a long-simmering debate within the family about the fate of the shoreline property.
  • They may want to continue using their property for the rest of their lives and then gift it to a non-profit of meaning to them, but they want to generate a tax deduction now for their gift (i.e., they want to make a current gift subject to a retained life estate)

There are also ways in which real estate donors often differ from the profile of a typical planned giving donor:

  • They may not have a strong giving record to your institution.
  • They may not show up in your organization’s wealth screening.

Let me say something more about the motivation of folks who make real estate gifts. Two surveys – one of the membership of the Partnership for Philanthropic Planning and one of the membership of Planned Giving Group of New England–yielded this clear conclusion about the three principal motivations that drive property owners to gift their properties:

  • Support for the mission and good work of the organization.
  • A belief that the real estate gift would fit well with their tax-planning, i.e. they could use the deductions (and benefit from the avoidance or minimizing of capital gains exposure)
  • They are ready to get out from under the ongoing responsibilities and hassles of continued ownership and management of the property.