Home Equity Conversion Mortgage (“HECM”) versus Charitable Gift Annuity (“CGA”)
In certain circumstances, and with thoughtful tax and estate planning, a reverse mortgage, like a HECM, may make more sense (and can be safer) than a Charitable Gift Annuity or (“CGA”). Except of course the asset used with the HECM is a primary residence versus another asset (like real estate or securities that generally has appreciated over time and is gifted to the charity in exchange for an annuity payment.)
A CGA is part annuity, part charitable gift. They can provide supplemental income payments, tax breaks at the time you make the gift, and give financial support to organizations the donor cares about. The concern is that when one donates an asset and that asset gets sold by the charity to fund an annuity, the donor becomes a general creditor of the charity which may or may not be fiscally sound, and may not be around for 20-30 years of an annuity payout.
Additionally, the actual CGA annuity payouts to the donor can, most times be smaller compared to regular annuities due to uncertainties about realizing the value of the asset and because the charity is not that interested in giving back to a donor a big return on the asset they gave them.
On the other hand, a donor who uses a HECM instead of a CGA, depending on their age, and value of their primary residence, and the equity in that residence, they can obtain up to $450,000 and more, in tax free proceeds to make available to a charity. The donor can determine the scheduled payout to a charity to maximize the charitable tax deductions. And the donor doesn’t have to assume the credit risk on the charity being unable to pay the annuity. Also the donor has US government protection on being able to stay in and use the asset they took a charitable tax deduction on, they never owe more than what the home is worth, and unlike a CGA, a donor can possibly enjoy market value increases in the primary residence.
For donors who have the financial means to afford home ownership, and for charities that do not have the technical expertise or fiscal worth to run their own CGAs, a HECM can help broaden the opportunity for elder homeowners to donate during their lifetimes to their favorite charity. But donors should make sure they get the proper tax and estate advice before following this strategy. And they should have the financial resources to make any such charitable contribution in the first case.
Download our eBrochure on Charitable Giving with a HECM.
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