Saturday, May 23, 2009

Ecological Gifts and Life Estates

As I wrote in my post on the tax benefits of ecological gifts in Canada, it is possible to continue to own and use your real estate, while receiving tax benefits now.

One way you can do this is to give ecologically sensitive land to a qualifying organization, while retaining a life estate (or life interest) in the land.

You can slice ownership of land in different ways. One way is to create successive interests in time. One person may have the right to the benefits and obligations of ownership during his or her life (called a “life tenant”), while another will receive possession of the land on the death of the life tenant (called the “remainderman”).

If you would like to give your ecologically sensitive land to a qualifying organization now in order to receive a tax benefit now, you can make the gift now while retaining a life estate on the title. You will be able to continue to use the land as your own during your lifetime, but you will also have to continue to have the obligations of an owner, such as paying property taxes.

What’s the catch?

Because you are retaining a life estate, which is something of value, the amount of the charitable tax receipt you will receive will be less than if you donated the land without retaining a life estate.

To receive the tax receipt, the land will have to be appraised. Appraising land is more complex if there is a life estate. First the appraiser will need to appraise the value of the land if you sold it now. Then, the appraiser will have to appraise the value of your life estate, and deduct that amount to arrive at the value of the remainder interest that you are donating. The extent of the reduction for your life estate will be related to your age. If you are young, the recipient of the gift will probably have to wait a long time before obtaining possession of the land, which reduces the value of the gift now. The older you are, the smaller the reduction in the appraised value of the land.

Although you may retain the right to enjoy the land during your lifetime, you are giving up something of value. Because your interest in the land ends at your death, you cannot leave it to your heirs in your will. If you later need money to live on, you will no longer be able to sell the land for its full value. Although in theory you could sell your life estate, no one is likely to be interested in buying an interest in your land, knowing that on your death he will have to give up possession.

Although you may continue to use the land after making a gift if you retain a life estate, you may not change the use (without permission from the Minister of the Environment) or use the land in a manner inconsistent with its status as ecologically sensitive land.

What if you want to keep the land during your lifetime, and you also want your spouse and a child to have it for their lifetimes? You could keep a life estate for yourself, and give life estates to your spouse and a child, while giving the remainder interest (after the deaths of all three of you) to a qualifying organization. The amount of your charitable tax receipts will reflect the fact that the qualifying organization will not receive possession until the last of the three of you to die.

I recommend reading Environment Canada’s publication “Retaining the Right to Use Land Donated as an Ecological Gift.”

In my next post on ecological gifts, I will write about conservation covenants.

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