Charitable Giving in Reverse
By David Brown
We have all been asked, which is first the chicken or the egg? With charitable giving what is first, the
donation or the legacy? When making a major gift, is legacy part of the conversation or an
afterthought?
Let’s not over complicate the idea with elaborate plans like a charitable remaining trust, but just a yes
or no to sharing your estate with a college, hospital, religious or youth group, animals, veterans, or any
other worthwhile charity.
If yes, then what is the plan for the transfer of the gift to the charity? Is the gift major enough to be of
legacy caliber? When does the charity get the gift, before I die, after I pass, or yet another generation
downstream? The answers to this will affect the legacy and gift in many ways.
Let me share a real-life story I was able to assist with creating a charitable legacy, making the
benefactor an integral part and a source of joy for the rest of her life. The challenge enlightened my
thinking to explore new options, and I hope yours too.
I met this wonderful energetic octogenarian woman at a senior trade show where I was a vendor for my
reverse mortgage company. She shared with me that she had no need for a reverse mortgage as her
entire estate was going to her lifelong charity. I said, “God Bless You” and wished more people made
such generous commitments to charity. I am on the board of directors for a well-known youth
organization and know first-hand just how difficult it is for securing major donations.
I asked her to tell me about the charity she wanted to bequeath her estate to. Turns out that her
passion and love for this charity were infectious with her enthusiasm and everyday volunteering. She
knew of the daily struggles the charity had for lack of funds and reaching their full potential with current
resources.
Problem solved. Considering all her comments, I had an idea that I knew could help her. In her current
gift plan, the assets would be transferred upon her death whereby the charity would liquidate her real
estate and other assets to cash, in this case about $5 million. They would then use the gift to put up an
expansion to their existing building and put her name at the doorway. I told her this was not a legacy,
but a tombstone in a new location.
Explore the possibilities and share with her new ideas for the charity she so loves, was my goal. What if
she could give the charity $1 million now and the rest upon her passing? She would be even more
engaged with the charity and it would give her purpose, joy, and renewed energy every day forward. This
is building an enviable legacy with her gift, vision, and being a key participant with the charity. She
thought the idea was awesome, but I don’t have that kind of cash to donate and still need my
investments to live on. Okay, let’s see how we can move from an idea to a reality.
Her home was appraised at just over $4 million and she had a small mortgage with payments of say
$3,000 per month. By utilizing a reverse mortgage, we could get a principal limit of $2 million which is
enough to pay off the existing mortgage, make a gift of $1 million to the charity and have a line of credit for the balance of $600,000. The payment flexibility of the reverse mortgage did not require a monthly
payment, so her cash flow improved by $3,000 because she no longer had payments to the previous or
current lender. Her gift also allows for an IRS charitable tax deduction of up to 60% of her AGI each year
with a carry forward until fully utilized. For example, let’s say her annual AGI was $200,000 with a state
and federal combined tax rate of 40% she would save $48,000 per year in tax payments over the next 8
years.
Now let’s consider the economic effect on the estate and my spry octogenarian. The property appraised
at $4 million and let’s apply a modest 3% appreciation rate or roughly an increase of $120,000 annually.
The debt of $1.4 million (remember no payment or accrual for the line of credit of $600,000) accrues at
say a rate of 7% or $98,000 per year. The appreciation still outpaces the accrued interest by $22,000
per year.
We fast forward to the time of death of our generous benefactor. The estate transfers to the charity
that sells the assets at the appreciated value, and pays back the lender’s debt of $1 million-plus interest
which they received and employed. The total gift is right where our beautiful benefactor and worthy
charity anticipated. The charity received a major gift sooner than anticipated with the balance at time
of death. The benefactor was able to help the charity today, improve their monthly cash flow, receive
some nice income tax benefits, and build an envious family legacy.
About 4 months after our meeting at the trade show we went forward with this plan for her estate and
charity. It was a complete win-win for everyone. The charity received a $1 million gift. Thank God, our
dear benefactor is still with us. Not quite as spry but spending every opportunity at her charity helping
others and living her days with joy and fulfillment of a legacy she only dreamed of.
This same technique can be helpful for trust and estate planners, foundations, and tax planners to share
with other charities. You will be overjoyed by the same fulfillment and satisfaction I had helping
benefactors establish a generational legacy and resources for charities to pursue their mission.
David Brown
Branch Manager
HighTechLending
1603 Copenhagen Drive, Suite 6
Solvang, CA 93463
DBrown@HighTechLending.com
805-686-2321
