Employing reverse mortgages and gift annuities can help planned-giving officers guide elderly donors into mutually beneficial arrangements.

By Steffan F. Cress

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.

This newfound position creates an opportunity planned-giving officers long for: the discovery of a qualified donor who possesses a qualified asset where one didn’t exist before. Fundraisers often find themselves running out of marketing/business development ideas due to the somewhat limited field of opportunity available to them — everyone in the known charitable universe is chasing the same donors and dollars year-in, year-out. Using the above premise as a starting point, the following should provide the enterprising planned-giving officer an additional door to open, one that leads him or her to a previously untapped source.

The who and the what of it
Let’s continue by asking just who and what is this untapped source? The who is a qualified donor; the what is a qualified asset. Typical qualified donors (for GAs) are those with moderate-to-strong donative intent who are of age (at least 62) and have some knowledge of estate and financial planning. This knowledge could have come from your organization, the donor’s trust officer or even a seminar on the topic.

For purposes of this article, a qualifying asset is the cash equity in your donor’s home. Please note: Seniors have billions in untapped equity in their homes. So how can a clever planned-giving officer join the qualified donor with the qualified asset and discover a previously untapped resource? By marrying an uncommon resource (a RM) with a common vehicle (a GA).

Is it coincidental that seniors have greater value in the equity of their homes than any other asset and also are qualified by age for GAs (usually over 60) and RMs (at least 62), too? Remember: qualified donors with qualified assets. Is it also coincidental that those with the greatest donative intent might be those with the greatest need: your senior-age donors?

How does a motivated donor convert the equity in his home into cash without selling or leveraging it? By “reversing” the mortgage process with guidance from the planned-giving officers. Due to the inability of many seniors to qualify for conventional financing, a RM almost becomes necessary to complete this transaction. With this in mind, let’s have our planned-giving officer guide a qualified donor through the process.

Here’s the how
First, of course, the donor has to qualify for a RM; if the donor is a homeowner, has some equity and is at least 62, he’s qualified. For demonstration purposes, let’s assume a 62-year-old donor takes a lump sum of $100,000, which represents his equity (or a portion of it) and converts it to a GA with your organization. At 62, the GA rate for a single annuitant is 5.9 percent, which is almost double taxable equity yields and taxable bank CD yields.

Now your donor has a lifetime income stream of $5,900 every year or $491.66 every month, and you are $100,000 closer to your planned-giving goals. If the donor had a conventional mortgage, it was satisfied in the RM refinance, resulting in him having his monthly payment liquidated. Remember, the RM lender pays the donor. So now your very happy donor has $491.66 per month he didn’t have before and no more mortgage payments to make. And now the family name is in the boardroom and at the top of the gift-recognition plaque.

The benefits
As previously mentioned, RMs and GAs have a number of complementary features and benefits. At the risk of repeating a few, here’s a breakdown:

* They both are senior-friendly. By law, RMs can’t be contracted with a homeowner who isn’t at least 62. The older they are, the greater the RM payout. Since GA rates are actuarially governed, the older the donor, the greater the rate and the subsequent payout.

* RMs and GAs both are market beaters. If home sales are soft and the equity is locked in, how is it accessed? Beat the market by reversing the mortgage. As stated before, GAs beat traditional returns of bank CDs and bond and stock market yields without the risk. The net taxable yield beats a commercial annuity due to the charitable component.

* Both have regulatory oversight. More than 90 percent of RMs are government-insured. GAs are governed by the American Council on Gift Annuities.

* Both can benefit others beside the client/donor. The income stream from a GA could support a local church or synagogue, or pay for a grandchild’s day care. A GA can be deferred to benefit another annuitant at a later date. Without a RM, this might not have been possible.

* They can enjoy some creditor protection. With the refinancing of a conventional mortgage to a RM, there is no mortgage-related debt. No mortgage, no creditor. GAs are contracts between your organization and your donor, and the contract “belongs” to an entity other than your donor. It would be prudent to have a legal adviser review this.

* Both offer a variety of payout options. RMs can disburse a lump sum or periodic payments. GAs can be contracted as immediate or deferred, one life or two, and in monthly, quarterly or annual payments.

* Both enjoy tax-favored status. RMs are mortgages; they are loans. Loan proceeds are not taxed as income. GAs have a built-in charitable component that drives some tax benefits.

* All parties enjoy the legal protections inherent in contract law. Mortgagors and mortgagees have legal rights under a RM agreement. Your organization and your donor each will have protections and obligations with a GA.

* Both products enjoy a good reputation with industry professionals. There are no learned, credentialed financial professionals who disdain the use of these two products when their use has been qualified.

* They aren’t gimmicks. Like CRTs and ILITs, they exist independent of each other as legal financial strategies but with complementary features and benefits. The tax code doesn’t have to be tweaked or twisted to make them fit. They weren’t created to be an income-hiding or tax-evasion device. Marrying them won’t obfuscate anything.

Much of the aforementioned is a generalization. The responsible planned-giving officer will consult with the board and a legal adviser before adding this strategy to the policy manual. It also is assumed that the planned-giving officer has a basic understanding of the rules and regulations governing GA issues.

Also, it should be said that the successful planned-giving officer is in the relationship business. This strategy fills the bill for a high level of donor cultivation, service and relationship building. As for a business-development function, the RM lender might have a company foundation that issues grants or it might be enlisted as a corporate sponsor for a special event, securing another relationship.

When you can show your donors how to do good and do well at the same time, your organization will fulfill its mission beyond all goals and expectations.

Steffan F. Cress is the director of major gifts at The Children’s Home in Tampa, Fla.