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 overcomplicate 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 business. 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, “I wished more people made such generous commitments to charity. I am on the board of directors for a well-known senior organization and know first-hand just how difficult it is to secure major donations.
I asked her to tell me about the charity she wanted to bequeath her estate. 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.
I Explored the possibilities and shared with her new ideas for the charity she so loves. 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 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 4% appreciation rate or roughly an increase of $160,000 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 $62,000 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 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, 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.
Ted Lange, CFP • NMLs #455531 • DRE# 021933796
[email protected] / (760) 753-1568