Philantropy Begins at Home
Appeared in the Christian Science Monitor
SAN FRANCISCO
It's the season of swanky gala fundraisers and opening-night art events, but these days forward-thinking charities might not ask for your checks. Instead, they might ask for your house keys.
Stock-market see-sawing has shifted a greater share of many Americans' net worth to real estate, and charities have taken notice. Tapping that wealth has led some nonprofits to unveil savvy new tools. The nonprofits' first goal: Make the process of donating real estate attractive by offering donors - often elderly homeowners - ways to avoid estate taxes, pay off their mortgages, and even earn a stipend for life. Becoming a real estate donor involves some experienced maneuvering - not to mention a full contingent of lawyers and financial planners - but the benefits can be significant.
Experts say donors should familiarize themselves with the many real estate giving options and make clear who will bear the real estate transfer costs. Experts also recommend evaluating proposals from multiple nonprofits as many charities have different programs for real estate donations.
While donors need to be savvy, charities need to avoid real risks. "Real-estate fundraising isn't for the faint-hearted. Charities need to watch out for bad property or else they'll be stuck footing the bill," says Leo Arnoult, chairman of the Trust for Philanthropy and a Memphis-based fundraising consultant. "Most donors have good intentions, but some charlatans might be looking for clever ways to off load bad properties." Some experts express concern that charities may flout tax codes, creating proposals that seemingly have no cost to the donor and leave charities with all the risk. "There's clearly the opportunity to bend the tax code and a probability that abuse will occur," says Mr. Arnoult.
Real-estate donations come in many forms. Some are simple "bargain sales," where a donor sells a home to a charity at a substantially reduced price. The charity then resells the house and pockets the difference.
Proposals that offer the most donor benefit usually incorporate a hefty charitable donation, mortgage payoffs and annuities. Take a $500,000 home with a $100,000 mortgage. A charity may purchase the home for $100,000 - allowing the donor to payoff the mortgage - and offer the donor a tax deduction for the remaining value. That spells significant tax savings to most donors.
More complex transactions incorporate "life-estate contracts." One such deal allows donors to reside in the donated property until their death. Another results in the donor receiving a lifetime annuity in exchange for their donation.
Typically, a donor and a nonprofit will agree on the value of the annuity, but it often falls within 20-50 percent of a home’s value. Here the charity may front the cost of the annuity with what it hopes to gain in the home’s future sale.
Would-be donors can expect to see more nonprofits making real-estate options available as charities notice its advantages. Donating an automobile can cost as much as 80 cents on the dollar for a charity to process. An opening night arts gala might return 50 cents. Conversely, one home donation can potentially bring in more revenue than a typical fundraiser, according to Chase Magnuson, president of Real Estate for Charities of Carlsbad, Calif. Magnuson claims that less than 20 cents on the dollar goes to funding real estate donations. "Nonprofits are missing the boat by not tapping into this fundraising source," Mr. Magnuson says.
Marsha Lubick, vice president of philanthropy for Sharp Healthcare Foundation of San Diego, a Southern California hospital group, says her organization has seen a big increase in real-estate giving. "We send out dozens of proposals each month to donors interested in giving their property. It's important to give people options. We try and put together a package that will allow them to keep their home and give them monthly income." Lack of resources and know-how has kept most of the 1.2 million charities in the US from adding real estate to their fundraising portfolio. In fact, only 2 percent of the $240 billion Americans gave in 2002 was real estate and is primarily donated to academic institutions according to the AAFRC.
Magnuson says that figure stands to rise dramatically as more nonprofits diversify their fundraising activities in a tight economy. "Most organizations are reluctant to accept [real estate] donations because they're afraid it will be too difficult and it will take too long to benefit," says Magnuson. "That [reluctance] will change." Ms. Lubick knows the money isn't immediate and says it averages about a year for a donor to decide. "This is never an easy decision. Many homes have a lifetime of memories and that's hard for some people to give up." Lubick says many donors are torn between willing their property to their children and donating the real estate.
To help with the decision, Lubick says the key is a slow approach that involves the family and time to reflect on the advantages of donating a home. "It's a way for a donor to have a lasting legacy and get some immediate benefits from it," she says. Don't expect your community's soup kitchen to accept a major real-estate donation. According to Arnoult only medium to large nonprofits - think AARP and the United Way - are capable of handling these complex transactions. The financial and expert resources are greater than most small nonprofits can handle. For potential real-estate donors, Magnuson says having the right intention is critical. "Make sure you understand the many intricacies of planned giving, but understand that this is about giving to a charity. This should benefit everyone."
