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Tax Implications | Donating a Remainder Interest | Donating Land by Will | Donating a Property to Generate Conservation Funds | Donating Undivided Interests | Donations that Establish a Life Income

Donations that Establish a Life Income

Some charitable donations provide donors with regular income payments for several years or for life, as well as offering a one-time income tax deduction. These “life income gifts” are ideal for those who donate highly appreciated property (such as land), and who want to supplement their income. Among various life income gifts, two work particularly well for donations of residential or commercial property. The charitable gift annuity and charitable remainder trust are not land protection tools in themselves, but are included here because they provide income and tax benefits for the donor and a financial boost to the receiving organization.

Grandmother and grandchild

Charitable gift annuities can increase retirement income while making a significant contribution to land conservation work. Photo: © Sara Gray

Example of a Charitable Gift Annuity

A land trust supporter in her mid-seventies wants to help a community campaign to buy a meadow where local residents enjoy walking and picnicking. She would like to donate a small rental property, worth $76,000, but she still needs the income it provides. The property pays an annual net return of $2,800 (a 3.7 percent return on investment).

The donor and land trust decide to use a charitable gift annuity. The supporter donates her property to the land trust; in return, the trust pays her $5,320 per year for life and sells the property to help fund that commitment. The donor pays no capital gains tax when the property sells. In addition, the donor receives a tax deduction equal to 59.2 percent of the property’s value (or $45,450).

Gift: $76,000
Federal Income Tax Savings (approximate): $12,559
Annual Income (89% increase): $5,320

This technique allows the donor to boost her annual income and receive more than $12,000 in annual tax savings (which if not fully used can be carried forward for up to five years). With the rental property proceeds, the land trust is better able to acquire a valued community resource.

(Adapted from Vermont Land Trust’s Planned Giving Workbook)

Charitable Gift Annuity

A charitable gift annuity is part gift and part annuity contract. It is the simplest life income gift available. Using a short contract, the donor agrees to transfer property to a nonprofit organization, and the charity agrees to make regular annuity payments to the donor or a designated beneficiary for life. The payments are fixed over the life of the annuity, usually ranging from 6.5 to 8.5 percent of the property’s value. Gift annuities can be funded with an asset worth $5,000 or more.

Generally, the annuity is funded by selling the donated land (after placing conservation restrictions on it, if warranted). Land trusts can acquire important conservation land in this manner: the annuity becomes a form of installment purchase with the donor entitled to a charitable income tax deduction (based on the donated land’s value less the expected value of the annuity payments, determined from IRS actuarial tables). The capital gains tax is lower than in a fair market value sale and can be spread over the term of the donor’s actuarial life expectancy.

You can donate a conservation easement to one land trust while granting the land itself to a second organization (in return for a charitable gift annuity). Or you can grant unrestricted land to an organization that will set up a gift annuity and place the land under easement before selling it. In either case, the organization may sell the easement-protected property to generate the income needed for annuity payments. Any surplus proceeds, after the annuity obligation expires, support the organization’s conservation work.

Charitable Remainder Trust

The charitable remainder trust (CRT), while not in itself a land protection tool, can be combined with a conservation easement to preserve land and provide lifetime financial benefits for the donor. The CRT is most advantageous for those who hold highly appreciated property that they no longer wish to own. It allows the donor to convert a low-yielding asset into an income generating asset while benefiting a charity (such as a land trust) and avoiding a capital gains tax on the sale. The landowner establishes a CRT and then gives her property to it. The CRT then sells the property and invests the proceeds to fund guaranteed annual income payments for a set period of years or for the lifetime of the landowner and named beneficiaries. At the end of that term, the Trust pays out the remaining invested funds to the charity.

With a CRT, the donor/landowner gets both guaranteed income and a current income tax deduction for the eventual gift to the charity (based on the asset’s value less the expected value of annual income payments). Net income for the landowner and any named beneficiaries may actually be greater than from a private sale since the capital gains tax is avoided. Unlike the charitable gift annuity which is limited to two beneficiaries, the CRT permits any number of beneficiaries (although greater numbers of beneficiaries result in a lower charitable deduction).

CRTs can provide important financial support for nonprofit organizations, enhancing their work beyond the beneficiaries’ lifetimes. They can also be used in conjunction with conservation easements if the easement is completed before the property is given to the CRT (which is not permitted to donate an easement or land because it would lower payments to beneficiaries). If a land trust would like to own the property as a preserve but cannot pay its full value, the landowner can donate a partial interest in the property to the land trust prior to establishing the CRT, and then the CRT can offer the remaining partial interest for sale. The land trust is the most likely buyer, but it is critical that the sale not be arranged before the CRT is set up. Proceeds from the sale of the remaining partial interest will fund the CRT, and the land trust can own the land for a bargain price.

The initial gift for a CRT must be quite large (more than $50,000) due to administrative costs. Most trusts are administered by a financial institution, although they may be managed by an individual (even the donor). The advice of a tax attorney or financial planner is essential when considering these kinds of gifts, given their complexity.