Making your real estate work for youBuy land–they ain’t making any more of that stuff.

–Will Rogers

SU M M E R 2004

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On an economic level, real estatehas proven to be the cornerstone ofthe fortunes of many of the country’swealthiest people. Smaller investors,too, have used the unique benefits of real estate investments to increasetheir net worth.

However, a real estate investmentcan require a significant commitmentof time and resources to manage andmaintain. One of the most significantchallenges of real estate is that, evenin a relatively strong market, it cantake some time to dispose of it andconvert its value to cash. This hasmajor estate-planning implications,especially in regard to the estate-tax liability attributable to real estate holdings.

An excellent choiceto fund a charitable gift

Many a real estate investor withsignificant charitable objectives willfind that real estate is the best assetto give. One of the most importantbenefits of using appreciated realestate to fund charitable gifts is theability to reduce or even eliminatethe capital gains tax that will bedue if the property is sold.

In addition to the tax benefits, agift of real estate also relieves an

owner of the many burdens of own-ership: insurance costs, rent collec-tion, maintenance, yard work, etc.

A gift of real estate also addressesissues of estate liquidity. You maypreserve your cash and those assetsreadily converted to cash, such asstocks and bonds, to address liquidityneeds that may arise during estateadministration.(See Example 1)

Perhaps no one has been better than Will Rogers at distilling a complex concept into a simple, meaningful phrase. More thanhalf a century later, and with twice the population of his time, Will Rogers’ statement is more apt today than ever. Indeed, thequest to own one’s home is the “American Dream,” pursued by two out of three families.

Example 1Tom G. wants to make a majorgift to support the University of Wisconsin-Madison.Undeveloped ground that hebought several years ago for$10,000 is now worth $100,000. Ifhe sells, because of the 15 percentcapital gains tax, he will owe atax of $13,500.

Instead, he decides to give the land as his gift. He does not recognize any gain, and he canclaim a deduction for the land’sfull $100,000 fair market value. In his 33 percent federal incometax bracket, Tom’s gift saves him$33,000. The real cost of Tom’sgift is only $53,500 ($100,000market value, minus $33,000income tax and $13,500 capitalgains tax savings).

A host of charitable options

Real estate holdings are adaptable to a variety of charitable-planningstrategies, some of which, in fact, are available only with real estate.

Give a fractional interest

Real estate ownership is, by its verynature, an abstract concept. You can’tpick it up and put it in a container.Ownership is designated throughdocuments recorded in the appropri-ate governmental office, making it arelatively easy matter to create a frac-tional interest in real estate. This maysuit perfectly the charitable givingobjectives of some property owners.(See Example 2)

Example 2Gloria would like to use herinvestment in an apartmentbuilding to fund a gift to theUniversity of Wisconsin Foun-dation worth $75,000. Afterappraisal and careful planning,she decides to transfer an undi-vided one-fourth interest in thebuilding to us. The appraisalshows that the value of this fractional interest is $75,000.

Universi ty of Wisconsin Foundation / WISCONSIN Dividends 3

Part gift, part sale

You may want to use real estate tomake a gift, but you need to recoupsome of its value. Real estate pro-vides the flexibility to accomplishthis through the use of a strategyknown as a bargain sale.

A bargain sale is just what itsounds like: An owner transfers realestate to a charitable organization inexchange for a payment that is lessthan the full value of the property.Typically, the donor qualifies for acharitable deduction equal to thedifference between the fair marketvalue of the property and the amountof the payment received. In addition,the donor has to recognize the capitalgain attributable to the “sale” element(amount received).(See Example 3)

Make a gift and retain possession

Perhaps you would like the UWFoundation to have your residencewhen you are gone, but you want tocontinue to live there for the rest ofyour life.

You may choose to leave yourhome to the UW Foundation in yourwill as one way of carrying out yourplan, but that does not create anycurrent income tax benefit for you.However, with a gift of a remainderinterest with a retained life estate,you can retain the right both to livein your home for life and receive avaluable charitable deduction bytransferring it to the UW Foundation,subject to your right to live there for life.Note: While some other types of realestate, such as commercial propertyand undeveloped land, are suitablefor many types of gifts, they are notappropriate for this particular plan.(See Example 4)

Receive a stream of income

Real estate is an excellent asset tofund a special planning vehicleknown as a charitable remaindertrust, which makes payments for lifeor for a specified number of years(up to 20) to one or more designatedbeneficiaries. These payments arebased on the value of the trust’sassets. At the end of the trust term orat the death of the last beneficiary,the remaining assets pass to a designated charity. The value of this“charitable remainder” qualifies for acharitable deduction.

Example 3

The Taylors own a vacation lakehouse that they rarely use nowthat their children are grown.They would like to make a sub-stantial gift to support UW-Madison, and they think the lakehouse would be an ideal assetwith which to fund their gift.

This home is now worth about$250,000, and the Taylors wouldbe happy to use it to make theirgift if they could recover theiroriginal $100,000 investment.After some discussion, we enterinto an agreement with them topurchase the house for $100,000.They are entitled to a charitableincome tax deduction of $150,000as a result of this bargain sale.

Also, the Taylors have to recognize and report a capitalgain of $60,000, attributable tothe sale element of the bargainsale. Of course, the capital gainthe Taylors have to report is morethan offset by the charitablededuction.

Example 4

Alan, 78, has intended for sometime for the UW Foundation tohave his home eventually. Hiswill directs that the house begiven to us when he dies. Thehome is currently worth$400,000.

In order to realize tax savings during his lifetime, Alandecides instead to transfer thehouse now, subject to a life estatefor his lifetime. This allows Alanto claim a charitable deduction of more than $254,800 that, in his35 percent federal income taxbracket, saves him more than$89,180 in taxes.

● A charitable remainder annuitytrust makes fixed payments based on a percentage (at least 5 percent) ofthe initial value of the assets put intothe trust.● A charitable remainder unitrustalso uses a fixed percentage to determine its annual payout, butthat fixed percentage is applied tothe value of the trust’s assets as itchanges from year to year. So, if the value of the assets goes up, thepayout will increase.

Planning pointers

● A unitrust allows for a special provision for the payments to bemade each year only to the extentthat the trust has available income,guarding against depleting thetrust’s principal.● It also can provide that anyshortfall will be made up in futureyears in which there is excessincome. Given the illiquid nature ofreal estate, this type of trust—a net

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income with make-up charitableremainder unitrust (NIMCRUT)—ismost suitable for gifts of real estate. ● Yet another provision providesadded flexibility by permitting theNIMCRUT to “flip” to a regular unitrust upon the occurrence of a so-called triggering event such as thesale of the real estate. This permitsthe trustee to hold on to the realestate until it can be properly sold.Thereafter, the unitrust will start

paying a stated percentage of itsannual value without regard to howmuch income is generated by theunitrust. Thus, the payments couldbe made up of both income andtrust principal.

With wise charitable planning, youcan transform real estate holdingsthat generate no income into a sourceof annual payments—without sellingand generating taxable capital gain.(See Example 5)

Example 5Years ago, Helen Daley, 72,bought some acreage far from the edge of the city for $50,000.Gradually, development pushedthe city’s boundaries farther out,and now her land is worth$500,000.

Helen continues to pay realestate taxes on the property andmust maintain insurance and payfor mowing. Now retired, shewould like to sell and reinvestthe proceeds to supplement herincome, but the $67,500 tax oncapital gain would leave just$432,500 to reinvest. At 6 percent,that would generate $25,950 eachyear.

Helen is delighted to learnthat she can transfer this land toa 6 percent flip unitrust andavoid recognizing the capitalgain on the “built in” apprecia-tion. As a result, Helen will beentitled to an immediate charita-ble deduction of $255,145. In her35 percent bracket, this saves hernearly $90,000 in income taxes.

The trustee sells the land to adeveloper 18 months later—thetriggering event—for $530,000.The trust, being tax-exempt, willnot pay any capital gains tax onthe sale. The next year, thestraight unitrust will distribute$31,800 (6 percent of $530,000) toHelen. Thereafter, the annualpayment will equal 6 percent ofthe annual value of the unitrust.At her death, the remainingassets in the unitrust will be dis-tributed to the UW Foundation.

We are here to helpIt can take time to convert real estate to cash.

A gift of real estate can be a powerful planning tool for a charitably

minded person. While many of these giving plans are not terribly

complicated, they do require careful planning—including a “qualified

appraisal” to support your claim for a deduction and usually an

appropriate environmental testing certification.

Further, there are special situations when some depreciation must

be “recaptured” as ordinary income, thereby reducing deductions or

increasing taxable income.

University of Wisconsin Foundation / WISCONSIN Dividends 5

Marilyn Wilbur has been described as an“animal crusader.” She also is an animalrescuer who repeatedlyhas saved pets—mostlymixed-breed dogs—taking them off thestreet, keeping some of them as pets and finding homes for the others. In fact, all of herpets have been rescued.

Marilyn’s love for animalsinspired her to place her farm in a charitable remainder trust at the UW Foundation. The gift willeventually benefit the University of Wisconsin School of VeterinaryMedicine because Marilyn’s animals were regularly treated at the School’s teaching hospital.

“I appreciated the service that the veterinary school provided formy pets. I always said if I ever wonthe lottery I would give some of it to the University,” said Marilyn.“That’s when Nancy Nelson, direc-tor of development for the School of Veterinary Medicine, told me Ididn’t have to die or win the lotteryto make a gift. She then went on toexplain charitable remainder trustsusing real estate as a funding option.

“For me it was a win-win situa-tion. I had a farm with no mortgage,and we were ready to sell. However,if we sold it ourselves, we wouldhave been taxed on the appreciation,so we donated it to the UW Foun-dation. The funds from the sale ofthe farm were put into a charitableremainder trust. Plus, it saved me alot of bookwork.”

With the gift, Marilyn establishedthree separate funds to assist veteri-nary medicine students in need and,at the same time, to help ensurequality education for future veteri-narians. The funds honor differentanimals as well as a veterinarian atthe UW Veterinary Medical TeachingHospital.

The Hattie Bortnowski and Buster and Red Wilbur Fund will

aid a student in internal medicine.Dr. Bortnowski is a UW veterinarianand clinical instructor who has caredfor many of Marilyn’s dogs and cats.Red, a chow mix, was rescued off thestreets when very young but lived tobe 17 years old. Marilyn credits Dr.Bortnowski for Red’s long life, sincethe doctor searched the country for aparticular medication to treat him.Buster, a shepherd mix, was alsofound on the streets of Rockford,Illinois, in the middle of winter whenhe was just three months old. Helived to be 18 years old.

Students studying cardiology willbenefit from the Max and WhitneyWilbur Fund. Max, a German shep-herd rescue, became Marilyn’s mostreliable, protective dog. Whitney, a

Outstanding veterinary service leads to charitable remainder trust

Marilyn Wilbur established a fund at the University of WisconsinFoundation for each of her beloved dogs, Scooter, Red, Max, Buster andLyndee, to benefit the UW-Madison School of Veterinary Medicine.

(continued on back page)

shepherd mix, was rescued after a carwent up on a curb to hit the dog andthen drove away, leaving him with abroken leg. Many doctors treatedWhitney, but it was on his visit to theUW Teaching Hospital that his mostserious problem, heart disease, wasdiagnosed. The X-rays taken duringhis illness are still being used forteaching purposes.

“The inspiration to establish schol-arships for veterinary students wasbecause of the lack of knowledge theother veterinarians had. If Whitneyhad been correctly diagnosed by any of the three veterinarians whosaw him regularly over the nineyears of his life, he would have hadthe surgery needed to give him a better quality of life and probablylived twice as long,” said Marilyn.

The Skippy and Claude WilburFund will aid students studying oph-thalmology. The fund honors Skippy,Marilyn’s first rescue. Marilyndescribed Skippy, a border collie mix,as a “Will Rogers” dog because henever met a human he didn’t like.Marilyn also rescued Claude, a tabbycat that was being used for lunch-hour target practice at a local factory.Both Skippy and Claude were treatedat the UW for eye problems.

Marilyn also makes annual gifts,in addition to a will provision, forthe Lyndee and Scooter Wilbur Fundfor Companion Animal Externships.

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Erin Lingen is a recipient of theexternship. “The externship that Ireceived from Marilyn Wilbur wastruly amazing. With it, I went to theAnimal Medical Center (AMC) inNew York City to work with veteri-narians in internal medicine. Theexperience was so phenomenal dueto the tremendous caseload we saweach day,” Erin said.

“Reflecting back on my externshipexperience at AMC has made merealize that I would never have beenable to develop my interests in vet-erinary medicine if it had not been

for Marilyn Wilbur. Her overwhelm-ing financial support has impressedupon me the importance of acting asa role model to continue to encour-age and support youth in this area of expertise.”

According to Marilyn, “The nice thing about the externship andgiving now is that you hear from the students and it is gratifying tohear firsthand how you are making a difference.”

Veterinary servicecontinued from page 5

During a visit to the School of Veterinary Medicine Clinic, Madison-area physical therapist Courtney Arnoldy, at right, and owner LisaMastney of Stoughton use an inflatable therapy ball to help exerciseBourbon, a 1-year-old Golden Retriever recovering from multiple hip and elbow surgeries. The ball helps support Bourbon whileArnoldy stretches and encourages the dog to shift its weight from one leg to another.

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Philanthropy will mean the difference between the maintenance of a great university and the evolution of an extraordinary one.

University of Wisconsin Foundation Vision Statement

We would like to send you a complimentary copy of our booklet,

How to RealizeMaximum Benefits from Your Real Estate.

To get your copy simply return the enclosed card or call:

Russ HowesVice president, planned giving and legal affairs608-263-0371 russ.howes@uwfoundation.wisc.edu

Bonnie Bruce Senior director, planned giving 608-263-2135 bonnie.bruce@uwfoundation.wisc.edu

Scott McKinney Director, planned giving and real estate 608-262-6241 scott.mckinney@uwfoundation.wisc.edu

Ken Krueger Director, planned giving 608-265-8068 ken.krueger@uwfoundation.wisc.edu

Beth Wells Director, planned giving 608-263-9337 beth.wells@uwfoundation.wisc.edu

You should consult your attorney about the applicability to your own situation of the legal principles contained herein.

Please send me a copy of How to Realize Maximum

Benefits from Your Real Estate.

Please have someone from the University of Wisconsin

Foundation contact me about my gift plans.

I would like more information on the following

types of gifts:

Real estate Gifts from an estate

Securities Pooled income funds

Gift annuities Charitable trusts

Other

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Telephone: Home (_____)

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The University of Wisconsin Foundation engages those who care about the University,provides opportunities to enhance its teaching,research and outreach programs and guarantees ethical stewardship of the gifts received.

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