Case Study Charitable Asset Management RESIDENTIAL REAL ESTATE

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1 Case Study Charitable Asset Management RESIDENTIAL REAL ESTATE

2 Case Study Charitable Asset Management Assessing Potential Gift Property Donor owns a condominium in Florida that has been in the family for thirty years Property is being rented to generate retirement cash flow Present market value of condo is estimated to be $425,000 with an original cost-basis in 1984 of $180,000 Donor s children live far away and have no interest in Florida condo Questions to Ask Donor What are the donor s objectives in making a gift? (Determines gift vehicle) Is there a mortgage on the property or any outstanding liens? (Use caution with mortgaged property for Flip Charitable Remainder Unitrust (CRUT). Can mortgage be paid off?) Has the highly appreciated property become a burden to own? (Desire to reduce everyday costs such as taxes, insurance, utilities, maintenance) What is the current value of the property? Who is sourcing this estimated value? How is the title held? If jointly, are they a married couple? (Property can be retitled if not married couple) What is the environmental history of the property? Any potential buyers? (There can be no pre-arranged sale in existence) Typical Donor Profile Age 65 and older Multiple properties are part of donor s long-term appreciated asset portfolio No children or children are provided for by other estate assets or do not need to inherit Donor Motivation Support for the charitable mission of the organization Wants to eliminate capital gains tax liability Income tax deduction needed to shelter an unusual capital gain such as from sale of business or primary residence Desire to make a decision regarding a property rather than burden family after donor passes away Information to Gather Property Details Use State Street Global Advisors Site Review Checklist (includes detailed accounting) External services required and paid by Donor Qualified Appraisal / Legal Counsel External services required and paid by Trust Real Estate Broker Commission/Legal Closing Costs External services required and paid by Charity Environmental Phase I Site Assessment / Legal Counsel State Street Global Advisors 2

3 Case Study Charitable Asset Management Environmental Phase I & II Site Assessments The Phase I Environmental Site Assessment is the first step in the process of environmental due diligence to assess the risk that the property presents. A Phase II Environmental Site Assessment is done if there is contamination found in the Phase I Assessment and the charity decides that it wants to continue the due diligence process. The Phase II Assessment is more detailed and more expensive. Recommended Solutions Donor establishes a FLIP Charitable Remainder Trust (best practices is for Donor to be Trustee) Trustee (Donor) sells the property by engaging with local real estate agency Trustee (Donor) pays expenses of the property before the sale Potential Benefits of Flip Charitable Remainder Unitrust to Donor Donor avoids capital gains tax on highly appreciated asset Donor may take an immediate charitable, income-tax deduction equal to the present value of the charity s remainder interest (need qualified appraisal to calculate). This deduction can be used to offset unusual capital gain from sale of another property Donor receives a stream of income for life which can be used as supplemental retirement income Donor s philanthropic intent is carried out while furthering the mission of favorite charity Case Study Workflow Comparison: Donor establishes Flip CRUT with property vs. Donor sells property Assumptions Sale price is $425,000, Cost basis of property is $180,000 Capital Gains tax of 23.8% 5% total return on proceeds from sale of real estate (income + appreciation) Assumptions for Charitable Tax Deduction Property owner is 72 years old Sale price is $425,000, Cost basis of property is $180,000 Income tax bracket is 39.6% 5% Flip Trust Sell Real Estate Sale Price $425,000 $425,000 Total Closing Cost $25,000 $25,000 Capital Gains Tax $52,360 Net Principal to Invest $400,000 $347,640 Yearly Total Return $20,000 $17,382 5% Flip Trust Sell Real Estate Net Principal to Invest $400,000 $347,640 Charitable Deduction $221,736 Income Tax Savings $87,807 This case study may not be representative of the experience of other customers and is not a guarantee of future performance or success. This information is for illustrative purposes only. ssga.com For public use. State Street Global Advisors One Lincoln Street, Boston, MA T: The views expressed in this commentary are representative of State Street Global Advisors Charitable Asset Management through the period ended August 21, 2015 and are subject to change based on market and other conditions. The opinions expressed may differ from those of other State Street Global Advisors investment groups that use different investment philosophies. All material has been obtained from sources believed to be reliable but its accuracy is not guaranteed. There is no representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not a guarantee of future results. State Street Global Advisors The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. We advise you seek your own legal and tax advice in connection with gift and planning matters. This communication is not intended or written to provide legal or tax advice. This communication also is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties. (IRS Circular 230 Notice) Investing involves risk including the risk of loss of principal. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected State Street Corporation. All Rights Reserved. ID4878-CAM Exp. Date: 8/31/2016

4 Real Estate Site Review Checklist Person Completing Report Name Phone Owner Donor/ Legal Title Holder Phone Address Gift Property Street Unit # City / Town State / Zip County Country Date of Purchase/Inheritance Tax Cost Basis Mortgage Balance Terms Lender Est. Fair Market Value Source Land Area (acres or sq. ft.) General Description Has property been on the market before? Yes No When? For How Long? State Street Global Advisors ssga.com 1/6

5 Real Estate Taxes & Insurance Assessed Value $ Tax Parcel ID# Taxes $ Insurance* $ Insurance Company Insurance Company Contact *Insurance should be in the name of the Trust Title A title policy, or certified abstract of title sufficient for title insurance, will be required. Describe any known rights of way, easements, restrictions, purchase options, etc. giving others rights in the property Book / Page Certificate of Title Is a survey plan available? Does the land have legal frontage or an easement right to cross on adjacent land for access? If the land is undeveloped, what evidence exists to confirm that it can be built on? State Street Global Advisors ssga.com 2/6

6 Building Condition Check existing building components and note any unsatisfactory building conditions. Foundation Poured Concrete Concrete Block Field Stone Sump Pump Siding Roof Plumbing Clapboard Rubber Copper Asbestos/Tar Electrical Volts Brick Shingle Stucco Woodshake Lead Waste Amps Heating System Hot Water* Wood Stove Important: UST? Hot Air Gas Air Conditioning Window Units Central Water Source Municipal Well Sewage Disposal* Municipal Septic System Swimming Pool In-ground Above-ground Fixtures w / House Stove Refrigerator Garage Security Separate Burglar Attached Fire Iron PVC Circuit Breaker Steam* Electric Fenced AC Unit Asbestos Slate Fuse Solar Propane Chandelier Automatic Door Cars Low-heat Sensor Vinyl Metal Electric Wood Other Heat Access Code Special Key Yes No Aluminum Tar & Gravel Space Heater Oil * In Massachusetts, under Title V, a septic inspection and certification is required upon the transfer to or addition of new interested parties in the title. For residential property, the necessity for a Phase I Environmental Audit shall be determined after reviewing the following responses. For property used currently or in the past for any commercial, industrial or other non-residential purpose, a Phase I Environmental Audit by a professional engineer shall be performed. State Street Global Advisors ssga.com 3/6

7 Environmental Yes No Don t Know The property has prior or current use for industrial, commercial, agricultural, manufacturing, waste disposal or other non-residential purpose Stressed vegetation, unusual bare spots, oil sheen s, unusual odors in standing water Underground oil tank(s) or unexplained outside vent pipe or unused pipes in basement walls Large electric transformers (PCBs) Previous tests indicating radon Lead paint (usually present in pre 1980 homes) Asbestos insulation Termites/carpenter ants/ other pests Urea foam formaldehyde insulation (installed in 1970s) Flood plain or coastal exposure Earthquake potential Extensive wetlands or drainage problems Endangered plants or wildlife Hazardous materials or debris stored on land Known chemical or oil spill on land Adjacent commercial or contaminated property State Street Global Advisors ssga.com 4/6

8 If rental property, please complete the following: Tenants Provide a copy of lease(s) or summary of verbal understanding with tenant(s) Accounting of Rental Payments Units One Two Three Monthly Rent Security Deposit Last Month's Rent Arrears Annual Property Expenses for Escrow Account Electricity Heating/Hot Water Water & Sewer Landscaping Condo Fees Cleaning Fee Trust Agency Fee (deposit) Taxes and Insurance from page one Other Expenses Total Annual Expenses State Street Global Advisors ssga.com 5/6

9 Comments By Date Review and Approval By Date 2015 State Street Corporation. All Rights Reserved. ID4878-CAM Exp. Date: 08 / 3 1/ 16 State Street Global Advisors ssga.com 6/6