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Reserved life estate

I want to live on my property as long as I can. I like the idea of a will bequest, but is there any way I can get some tax advantages now?

When you donate your land with a reserved life estate, you commit to the gift but can continue to use the property during your lifetime. This option, also called a “life tenancy,” is a middle ground between a bequest and an outright land donation.

Ownership/residency effects

• You can enjoy continued residence on, use of and income from all or part of the property during your lifetime.
• Your spouse and/or other immediate family member(s) that you stipulate as “life tenants” can also enjoy continued use. However, extending this right to additional people—especially if they are significantly younger—decreases your potential income tax benefits.
• You retain typical owner responsibilities and costs, such as building maintenance, land management, insurance and property taxes.
• You can’t make management decisions that would significantly reduce the value of the gift. For example, you can’t log it or stop maintaining the buildings (unless permitted in the original agreement).

Financial/tax effects

• You can’t reverse a gift subject to a reserved life estate. In contrast, you can change a bequest during your lifetime. For this reason, the donation with reserved life estate may offer tax benefits during your lifetime while a bequest does not.
• You’ll continue to pay real estate taxes on the land retained for your family’s use.
• Your gift may qualify for income tax deductions. Your deduction is based on a formula using IRS actuarial tables and current interest rates.

Talk it over

Some conservation groups may prefer to avoid the complexity and delays associated with a land donation with reserved life estate. Others may actually prefer it to an outright donation. It’s an especially appealing option for groups that would someday like to own the property but do not wish to accept the costs and responsibilities of immediate ownership.

Find more details about the financial and tax impacts of conservation protections.

reprinted from Landowner’s Options, © 2007, Iowa Natural Heritage Foundation