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Saturday September 24, 2022

Case of the Week

Son's Intentions Paved with Gold - Part 1


Several years ago, Martha and Frank built a very unique home on 45 acres of beautiful rolling hills and woods. Frank passed away three years ago, and Martha now solely owns the 45-acre parcel and home.

She enjoys the peaceful country view out her front window. However, the university adjacent to the property is very interested in acquiring the property for eventual future growth. Not surprisingly, Martha is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that eventually some planning will have to be accomplished.

After obtaining a thorough understanding of Martha's needs and desires, Martha's attorney, Paul, crafted, a wonderful four-part solution was suggested which incorporated an outright sale, a unitrust, a gift annuity and a gift of a remainder interest in a home. (See Case Study "Peace in the Countryside" for a full explanation.)

Another component of the plan involves the potential sale of the home to their son, Sam, after Martha's death. Specifically, Sam enters into an option agreement with the university. It is a contingent agreement that permits Sam to purchase the home from the university. Sam intends to move the home into the city where he and his family can continue living in the "family home."

Martha worries whether this option agreement and purchase from the university is permissible. She remembers the prohibition on acts of self-dealing which prevented her from leasing property from her unitrust. (See Case Study "Dealing with the Five & Dime" for a full explanation.) Naturally, she wonders if this arrangement between Sam and the university would likewise cause self-dealing problems.


Can Sam and the university enter into an option agreement? May Sam later purchase the home from the university? Must the sale price equal the fair market value of the home?


Charitable remainder trusts, charitable lead trusts and private foundations are subject to Section 4941, which prohibits acts of self-dealing. However, public charities are not subject to Section 4941. While public charities have rules prohibiting certain excess benefit transactions to disqualified persons, there is no outright prohibition on acts between the public charity and donors or their family. The family home is subject to a life estate reserved by Martha, with a vested remainder in the university.

Since the university is not a private foundation, Sam may generally buy, sell, lease or otherwise transact business with the university. It is very important, however, that any transactions between Sam and the university be at arm's length. In other words, Sam may purchase the home at a fair and reasonable price. The university should not engage in any transactions that could give rise to an excess benefit transaction or a private inurement transaction.

Therefore, based upon the university's tax status as a public charity, Sam may enter into an option agreement with them. Further, assuming a fair and reasonable sale, Sam may also purchase the home from the university at some point in the future. Neither transaction will violate the prohibition on acts of self-dealing under Section 4941. Martha is thrilled with this finding and comforted with the knowledge that the "family home" will remain in the family for many years to come.

Published September 10, 2021
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