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More thinking outside the box - retirement and estate planning

March 27th, 2012 at 12:49 pm

I had a thought recently that might be an option in supplementing my retirement income or simply creating an income stream to help me get by. Now, later or down the road.

I won't likely act on it right away, but it bears consideration and is maybe something I would do in eight years or so.

I'm thinking "creatively."

Now I'm sure most of you are familiar with the way a reverse mortgage works. You sign over your house to a lender and in return you get lifetime possession and a monthly stream of income that gradually sucks the equity out of your home. Your heirs get nothing.

Now while I probably wouldn't consider a reverse mortgage because of their very high fees, I thought of something recently that seems to work very similarly to a reverse mortgage.

Is anyone familiar with a charitable remainder trust, aka charitable gift annuity?

I know a teensy bit about CRTs because I used to write sales literature for them way back when for a previous employer. But that was a long time ago and I'm sure the product has evolved.

As I understand, you make a gift to a charity in the form of cash, securities or real estate. My gift would be my house. In return, you get an annuitized income stream for life, a tax deduction (not sure based on what) and of course when you die, your heirs get nothing, because the asset no longer belongs to you.

I'm fine with that. I have already named a number of charitable groups as my beneficiaries in my mutual fund investments. In my will, I have named my parents and my 3 siblings. But as you may know, should the named beneficiaries in your will and investments conflict, your investment beneficiaries take precedence. So in my case, should I die, my family would actually get nothing except my house and material possessions. And I'm thinking of changing that by possibly using a charitable gift annuity as described above.

While I would want to leave $$ to my parents, I think it's safe to assume I'll outlive them. And my father doesn't really need the money. If I willed it to him, he'd probably just save it and then when he died, the money would wind up going to my two half-brothers.

We didn't grow up together and aren't really close at all, although my one brother did recently just have a daughter. Still, he doesn't seem to need the money either and I don't have a special desire to leave either of them money so they can buy some new living room furniture or take a really cool vacation somewhere. I want my money, which I worked so hard for, to do something purposeful and meaningful.

I have been a lifelong environmentalist and would very much like to see my assets benefit certain groups that are trying to preserve our open space, protect wildlife habitat and so on. So the idea of a charitable remainder trust really appeals to me. Even more so because my house represents a huge portion of my net worth that is illiquid and would otherwise not be accessible to me and would really only benefit me by serving as a place for me to live.

The kind of trust described above would enable me to draw some benefit from an illiquid asset and achieve some good at the same time.

Of course, I would have to think very, very carefully about doing this, becus forming such a trust is an irrevocable act, meaning, that once you decide to do it, you CANNOT undo it down the road if you change your mind.

I suppose if all I was after was some extra ongoing income, I could simply sell my house when the market recovered, buy a little condo and then enjoy the extra profit I'd make from the sale of the home. Which i might still do.

I happened to get my Nature Conservancy magazine in today's mail, and according to their little chart, if you donated $10,000 to them at age 60, you'd get a $440 annual payment and a $2,231 tax deduction. My house today is worth about $290K, so my annual payment, should I give them my house, would be in the neighborhood of $13,200, or $1100 a month, at least the way I interpret their chart.

What do you think? Am I overlooking something big here? Cus this sounds pretty good. Dido, MM? What say you?

6 Responses to “More thinking outside the box - retirement and estate planning”

  1. MonkeyMama Says:

    I used to work with charitable remainder trusts, but it's been so long (over 10 years) I honestly don't remember *anything* about it!

    I think it makes far more sense to consider this option when much older. Because, as you said, you may just want to sell the home and downsize, anyway. Though keeping your house may be best now, will it be the same when you are 70? Can you really afford all the upkeep and help you might need as you age?

    I'd also be wary of marketing material. How realistic are those income streams?

    Anyway, I think you will probably find this would not work. The point of the trust is that the assets generate income, and the income goes to the donor, but the asset goes to the charity when the donor passes. I am not sure if you can really donate a house in this fashion and still live in it. I also wonder where the "income" would come from. Generally, real estate goes to a trust like this when it is ready to be sold, but when the donor doesn't want to deal with taxes on the sale of the property. Then they can still earn income from the assets (the proceeds from the sale are invested), but side step the taxes.

    In general, this is a tool for the wealthy with money to burn and taxes to avoid... But I do seriously wonder if anyone would want the house anyway. Because where would the income stream come from???

  2. MonkeyMama Says:

    P.S. If it were me, I'd just sell the house. From an emotionally removed perspective. A lot of these really complex type things do make sense from a wealth/tax standpoint. But otherwise, you spend a lot of time, you pay a lot of fees, you make things really complex, and I don't think you would get much out of it. (A reverse mortgage would be in a similar category of complex and expensive. But if you really want to keep the house, it's probably a much simpler solution).

    I have a fair amount of experience with clients coming up with these crazy complex ideas when there is usually a pretty simple solution. So that is what I kind of think to.

    But I give you an A for effort. I think it's good to consider all options. For that I don't think it is a bad thing at all to be thinking about it!

  3. CB in the City Says:

    As someone who works in non-profit development, I have to say that no charity is jumping up and down about being gifted with real estate these days. The exception would be if it is located in an area desirable to the charity; i.e. if it is on the edge of a college campus it would be highly desirable to the college, but probably not so much to the no-kill shelter across town. Also, I don't know if a CRT can be based on real estate. Can't remember if I've ever seen such a case. But this is not really my area of expertise, so others might have more to offer.

  4. patientsaver Says:

    I'm pretty sure that real estate can be used inside a CRT...it says so, right in the NC ad. However, MM may be right, the assumption is that you're ready to sell the house and you have somewhere else to go; otherwise, where does the income stream come from?

    I think the assumption is that the property will be put up for sale immediately. Maybe I was wrong in somehow thinking you could still live in it.

  5. MonkeyMama Says:

    I was also thinking Baselle might have more input, being in the charitable field.

  6. baselle Says:

    Hmmm. I work for a charity that really deals in liquid assets, not to mention health and human services. If we were given it by a CRT, I'm fairly certain we would turn it around and sell it. No doubt we would counsel you that we would do that.

    But all is not lost - you talk about the house, and I've noticed that with your garden pictures you have a little bit of property associated with it. How much property do you have and does it have some sort of unique quality to it? Remember that we sold 70 or so acres to the Wi DNR back in 2007. It was land appealing to them because it was wetland, and it abutted land already under their management. Win win for us, but we sold rather than did a reverse mortgage.

    I think that the consideration is that the house and land have to be a good fit to the agency involved. And most importantly, since it is irrevocable, you'll have to pick the charity that you'll partner with very carefully. You want it to be stable, and even the stable ones can hire a nutball.

    Frankly I'd do a lot more research and proceed carefully. You want somebody else to do the shakedown cruise.

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