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Saturday, April 27, 2024
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Case Studies |
The Home Equity Retirement Income Plan
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Case:
Thomas and Phyllis Adams, both age 65, have lived in their home on the Malibu cliffs for the past 25 years. Over those years, they have experienced mudslides, ravaging fires and earthquakes. Three years ago, their home was partially destroyed by the canyon fires well publicized in the news, but they have since rebuilt because they love the area. Their home is perched on a cliff overlooking the Pacific Ocean and the view is breathtaking. Most important, however, is that children and grandchildren are all within a couple hours' drive and they love spending time with them. Thomas and Phyllis hope to live in this home the rest of their lives, but they realize that during the years ahead many contingencies could arise that would require them to move.
Thomas and Phyllis have been fortunate to acquire a substantial estate. They wisely invested in the cellular phone business in its infancy and since then have seen their estate grow to over $4.5 million. The home is valued at $1 million and the balance of their estate is primarily in marketable securities of various cellular companies. The stock has appreciated substantially in value as most of the securities have been held since the 1980s. They have adequate retirement income from their investments, but they are concerned that they may need additional income as they reach their 70s. In order to diversify their portfolio, they recently sold some of their cellular holdings, incurring a sizable capital gain.
Thomas and Phyllis are philanthropists and over the years have served on a number of foundation boards. They are particularly fond of the arts and have chosen to leave their home, upon their passing, to one of the more prominent art museums in the Southern California area. They considered passing the home to the children, but in family planning discussions, the children expressed little interest in inheriting the home. The children are now all settled in their own homes, have good jobs with promising futures and do not foresee ever moving to the Malibu area. Even if one of the children did desire to inherit the house, Thomas and Phyllis would be in a quandary as to how to divide the estate equally among the children. So, because of philanthropic desires, the best solution was to make a bequest of the home to charity after they are gone.
Question:
Thomas and Phyllis are concerned about the capital gain that they have incurred this year as a result of selling some of their stock holdings. The gain will result in substantial taxes and they would like to minimize the tax bite when they file their tax return next April 15th. Also, as stated above, they would like to generate some additional retirement income at or around the age of 70. An extra $2,000 or so per month is the desired amount, as Phyllis' commercial annuity payments end when she reaches that age. Phyllis purchased a commercial annuity back in 1975 and when she reached age 59½ she elected the option to receive payments over a fixed term of 10 years. So, Thomas and Phyllis have two questions: 1) How to replace the $2,000+ per month and 2) How to offset the tax liability as a result of incurring the capital gain on the stock sale.
Solution:
Thomas and Phyllis decided to pose these questions to the Director of Major Gifts, Janice Ferguson, at the art museum. They thought that since Janice had assisted them with the bequest of the home to the museum she might have some insight about how to best solve these problems. Janice is an attorney and is known as a very creative and forward-thinking professional. After reviewing the Adams's goals and objectives, she stated that one of the alternatives that may be considered is a deferred payment gift annuity combined with a life estate. Since they will be transferring the home to charity when they pass away, they should consider transferring the home to charity now with retained lifetime use. The remainder value of the home is then used to fund a deferred gift annuity that would begin payments when Thomas and Phyllis reach age 70. The results: Thomas and Phyllis retain lifetime use of the home, they will receive annuity payments for the rest of their lives beginning at age 70 and, lastly, they receive a current charitable income tax deduction. Thomas and Phyllis are very pleased with these results and they only have one more question of Janice: "Where do we sign?"
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