Doing Good and Doing Well

From time to time, the worlds of charitable and private enterprise join forces to create financial strategies that result in success for all parties.

You can find one such example in the formation of Charitable Remainder Trusts (CRTs). Besides the charitable benefit to the nonprofit organization and the financial benefit to the donor and the donor’s family, the impact of a CRT is greatly enhanced by the use of an Irrevocable Life Insurance Trust (ILIT). ILITs are funded by life insurance policies, which offsets the loss of the CRT’s corpus asset upon the death of the donor.

In addition to the charitable component of the CRT, the ILIT carries a built-in tax advantage: Life insurance proceeds are not taxed as income.

This example joins a charitable device and a financial device to create a gift-planning strategy where one didn’t exist before.

This article should offer yet another example of combining an existing charitable device — a Gift Annuity (GA) — with an existing financial device — a Reverse Mortgage (RM). Before continuing, a brief review of GAs and RMs may be in order.

Gift annuities and reverse mortgages
GAs are contracts between a charitable entity and a donor (also called an annuitant) to exchange an asset for income. The donor irrevocably contributes cash or a marketable asset in exchange for an income stream that is actuarially calculated. The older the donor, the greater the rate.

RMs are government-insured loans reserved for homeowners who are 62 years of age and older. By “reversing” the mortgage process, the senior homeowner (mortgagor) gets paid by the bank (mortgagee), unlocking equity the mortgagor might not have been able to access before. The older the donor, the greater the potential payout.

An additional benefit to the donor/mortgagor is the first-lien position held by the reverse mortgagee, so any existing mortgage must be satisfied in the refinance. Now an extremely advantageous position has opened up for your donor: No mortgage payments to the mortgagee plus receiving payments from the mortgagee.