Home-Donation Option:
A Strategy for Retirees
NEW YORK (Sept. 16, 2003) -- Usually, when you trade an asset for income, you give up your rights to that asset.
But imagine a scenario where you can swap your home for a lifetime of checks, but continue to live in the same house. And then imagine you're doing it all for charity.
As unlikely as this may seem, it's real strategy for senior citizens with a valuable home and insufficient retirement income. It's known as a "life estate and gift annuity," and is offered by a handful of charities around the country.
The only thing comparable is the reverse mortgage -- a commercial product that lets elderly people swap their homes to a mortgage company for similar benefits.
The catch is that it may be hard to find a charity willing to support this strategy. Most charities don't have the cash to pay an annuity before they sell the donated asset, said Lance Jacobson, development officer at medical research organization Mayo Clinic in Scottsdale, Ariz. Also, charities stand to lose money if the donor lives longer than expected or the house drops in value, he said.
For those reasons, the charities that do this tend to be large, and picky about who and what they accept. Many limit this charitable giving option to people well above 70 years old, and to those with expensive homes in neighborhoods where the values are expected to rise.
Compare to a Reverse Mortgage
Some people expect an annuity -- or the lifetime income stream -- from a home to be based on the full value of the house. But it doesn't work that way. The charity will slice and dice the home's value to protect their interest, which is one reason that charities often limit such transactions to people well advanced in age, and to homes of high value.
Here's how it works: You donate your home and the charity divides the value between the two parties based on a formula that calculate how long you might live. You might own 40%, and the charity will take 60%. The charity will then calculate your tax deduction and your annuity based on the 60%. Also, expect the charity to shave a percentage off the top -- often 10% to 20% -- to cover costs and hedge other risks.
How much that leaves you with is hard to tell. The older you are, the higher your annuity payment will be. Likewise, the greater the value of the home, the greater the chance that you will have enough to live on after it's all divvied up.
Consider: A 75-year-old with $1-million home might expect a tax deduction on about $218,000, or less than a quarter of the home's value. He might also expect an annuity payment of $42,000 a year, or roughly 4.2% of the donated value, according to calculation provided by the UCLA Office of Planned and Major Gifts.
If the income is equally important as the charitable gift, compare the annuity you'll get to a reverse mortgage. Keep in mind that the reverse mortgage company will also divvy up the value of the home to hedge against risk and to cover costs.
It's not always obvious which solution will pay more, especially after the tax deduction, said Judith Pillon, director of UCLA Office of Planned and Major Gifts. Often, people who compare the foundation's annuity to one from a reverse mortgage "come back to us," she said.
The Bad Experience
More charities and organizations that support local charities are warming up to the life estate and annuity option due to the a growing number of seniors with significant home values.
Nature Conservatory, a nonprofit in Arlington, Va., just added a life estate with an annuity this year. "There are some people for whom this is the only real option," said Martin Carovano, associate director of gift planning.
The Boys & Girls Club Endowment Foundation in Billings, Mont., began offering it three years ago and is actively promoting the strategy to financial planners. "It's something that the financial advisers aren't as well educated about it as we'd like," she said.
Meanwhile, the San Diego Foundation, which supports local charities, is in the process of getting regulatory approval to offer a life estate and annuity combination to donors.
Of course, there are charities that remain pessimistic. Robert H. Nourse, a director with the Office of Estate Planned Giving at Lafayette College in Easton, Pa., said he will "never do one again," after a bad experience many years ago.
The donor was an elderly couple, and the husband suffered a stroke immediately after they donated their home. This left the wife alone to care for her sick husband and the large house. The charity offered to sell the home and divide the interests, but the donor decided it wasn't worthwhile until many years later when the burden became too difficult, said Mr. Nourse.
"If people want to do this [strategy], I tell them this story," said Mr. Nourse. "There are things that can happen, and you really have to think about it."
-- Ms. Whitehouse is one of three Getting Personal columnists for Dow Jones Newswires.
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