Reader Q&A: Donate the House, or Donate the Proceeds?

Jan 28

An Interesting Call From A Client

In this blog post, I’m going to share an interesting call I got from a client last week.

I’ll call her Judith.

(*Please note that I did ask Judith’s permission to share her story, and she agreed as long as I protect her identity.)

Judith is a planner, a saver and investor, a philanthropist, and a very thoughtful guide for us all to learn from, in my humble opinion.

She called me with a question I had never been asked in my 20 years as a Realtor in Whatcom County.

Top off your tea, and let’s get into her story.

Judith’s Estate Plan

Judith bought a home back in 2006, and hired me as her home inspector at the time.

That was the year I first got my real estate agent license and was moonlighting as an inspector still, while I muscled my way through two whole sales that first year.

It was a fortuitous meeting with Judith, because Judith thought highly enough to call me about 5 years ago and tell me, “I’ve written you into my will as the listing broker for my home when I die.

I also have a clause that allocates ten thousand dollars for clean-up and prep before the sale.”

I was so touched by this incredibly meaningful gesture, and I welcomed the important responsibility.

Last week, Judith reached out to say she was updating her will and had some questions.

Can You Name A Listing Agent in your Will?

Before we get into her primary question, let’s address the topic of naming a specific listing agent in your will.

Is naming a listing agent in a will legal / enforceable?

Certainly you can put your wishes into your will, but the law would see the naming of a specific listing agent as a suggestion to the Executor of your estate, not an enforceable clause.

While Judith’s intent carries strong moral weight, the Executor (the person you name to “execute” the details of your will) holds the practical authority to hire the broker they deem best for maximizing the estate's value, or perhaps handling a particularly unique estate / real estate situation.

In practice, most Executors honor such requests if the named agent has a proven track record, as it aligns with their fiduciary duty to act prudently, but they could choose differently if conflicts arise, such as concerns over commission rates or performance history.

We talked about this and about my having the chance to meet the Executor, a local friend of Judith’s, so we have familiarity with each other way in advance of any estate-related dealings.

Judith’s Philanthropic Plan (and WA estate tax threshold)

Judith shared that, once the sale of her home is closed and expenses paid, she would like to donate 100% of the remaining net proceeds to a local non-profit.

“My estate exceeds the Washington Estate Tax limit of three million and change, and I’m wondering how I can formally get it below that threshold? I’d like to help our local organizations more than I want to pay tax dollars.”

“Which brings me to my question,” she said. “Should I instruct my Executor to sell the home first, and then donate the proceeds to the non-profit? Or should I actually leave the non-profit the title to the property?”

Such a good question.

Quick (but critical) Disclaimer

First – let’s be abundantly clear – I am neither an estate planning attorney nor am I a CPA or tax professional in any way, shape, or form.

Tax situations and questions are complex to the nth degree, and it is CRITICAL that Judith (and you) seek the advice of a professional who can look at the entire estate picture and all its parts, to devise the best strategy.

That being written, I LOVE these sorts of probate and estate-related questions and scenarios, and I had a few basic-level thoughts to share with Judith.

Ground rule: Don’t Gift The Condo During Life

First of all, for the purposes of this exercise, let’s assume that the total FMV (fair market value) of Judith’s home is the asset that straddles the WA estate tax threshold.

So if she donates the property or the proceeds from the sale, that tips her into no-estate-tax territory.

The first thing Judith should absolutely do is NOT donate her condo PRIOR TO her death.

This is an extremely costly mistake some families make.

If you gift (transfer title) to another person, whether they’re family or not, while you’re still alive, they receive that gift at your “basis” – or what YOU paid for it plus capital improvements, essentially.

If they then sell it after your death, they’ll be liable for taxes on the capital gains above that basis.

(Remember, Judith bought her home 20 years ago for a small fraction of today’s fair market value.)

But when you die first and THEN gift a property, your heirs receive that property at a stepped-up basis – its FMV at the date of your death – with no tax implication in WA state.

So for right now, Judith, hold onto your home.

The Key Decision: Leave Title To The Nonprofit or Donate Cash Proceeds?

I then asked her, “Do you have any reason to believe the non-profit would want to use the home and continue owning it, versus just selling it?”

“No,” she said. “They would only want the cash value.”

(The nature of her property, and the mission of this particular non-profit, certainly support this answer.)

“OK… next question: Would they readily ACCEPT title to the property?”

A piece of real estate seems like a gift ANYONE would jump at, but it’s important to check with a beneficiary (especially a substantial non-profit organization) before assuming they would be happy with receiving a piece of real estate.

Non-profits, much like banks, are not in the real estate ownership business, and it could be considered “generous but extremely distracting from our core mission and tasks” to go through the steps of owning and selling real property.

Best to check with them first, and if they DO give a green light to potentially receiving the title to the property, then we can move onto the options:

And those two options then are:

Instruct your Executor to list and sell the property while it’s still owned by the estate, and when the net proceeds land in the Estate’s bank account, make a cash donation to the non-profit.

Or…

Sign and record a TODD – or Transfer on Death Deed – automatically gifting the entire property to the non-profit upon your death.

How a Transfer on Death Deed (TODD) Works

A Transfer on Death Deed is a way for a homeowner to avoid having their real property go through probate, because it sets up the title to transfer directly to the intended beneficiary, in this case the non-profit.

The non-profit would be notified when Judith dies, they would schedule an appointment at a local title company where they would sign an affidavit, and once recorded along with Judith’s death certificate, the property would be transferred into their name.

They could then hire a listing agent, sell the property, and pocket the proceeds tax free, as they would have acquired the property at its stepped-up basis (fair market value at the time of Judith’s death.)

Why TODD Can Shine For A Nonprofit Beneficiary

The benefits of the TODD are numerous:

The house skips probate, so the non-profit becomes the owner and can do what they please potentially months before they would otherwise.

A TODD transfer of real property is exempt from excise tax (per RCW 82.45.010(3)(g), saving 1.78% of the property’s value and increasing the donation amount – and the deduction amount to the estate’s tax burden.

The TODD also saves Judith’s estate other closing costs such as Realtor fees, title insurance, escrow, etc., making the estate’s donation amount the full, fair market value of the property – not just the net proceeds.

The Executor of Judith’s estate isn’t burdened with selling the real property, which lowers the Executor’s liability and hassle-factor.

Once the non-profit becomes the legal owner of record, they can turn right around and sell it, pay the customary closing costs from their proceeds, and pocket the net.

Win win.

Parting Wisdom From Judith

Judith didn’t become the steward of such a healthy estate by making uninformed or hasty decisions.

She will undoubtedly cross-check this strategy with her “Estate Planning Board of Directors,” which we should ALL create for ourselves and have ongoing check-ins and conversations with.

If her ultimate decided-upon strategy differs from what I’ve written above, I’ll share that with you so we can all learn.

(Judith, please keep me informed, OK? )

“Do Your Giving While You’re Living…“

Judith and I spent another 45 minutes on the phone that day, talking over her broad plans for philanthropy, and other local organizations she plans to write into her will.

I was inspired, deeply impressed by her forethoughtfulness and generosity, and incredibly humbled to be part of her overall plan.

This sort of careful orchestration of a person’s estate is how legacy is created.

It is also not difficult, and not relegated to the ultra wealthy or any sort of “exclusive” sector of society.

Any of us with anything of value to bequeath after our death can do some level of this type of community support and legacy-leaving.

Judith closed our conversation that morning with a short and powerful poem she learned from a mentor, in an earlier decade:

“Do your giving while you’re living, so you’re knowing where it’s going.”

Wise words from a dear friend.