Universities today are increasingly wooing elderly homeowners with a long-used but rarely promoted trade-off:
A lifetime annuity in exchange for the university's eventual ownership of the home. And in few states, plan administrators suggest, is the ground more fertile for such an approach than in California, where there are more than 1.5 million homeowners over the age of 65 sitting on housing that has exploded in value tenfold over the last 30 years.
There are various ways to address the question.
The most common arrangement for achieving this trade-off is a variation of the "gift annuity"--splitting ownership of the home into two legal entities. One would be the "life estate" or the right of the donor to retain physical possession of the home until death. The other would be the "remainder estate," or the institution's right to free title to the home when the donor dies.
State License Law
Under California law, for instance, this gift annuity approach requires that the charity or university be licensed through the California Department of Real Estate.
Pepperdine University and UCLA are. At USC, however, according to Geoff Gilchrist, director of the real estate division of USC's Development Council, the same end result is achieved without going the licensing route.
"We've just never done the gift annuity, as such," Gilchrist says, "not really because of the licensing requirement but because when you issue a gift annuity, what you're doing is pledging all of the assets and resources of the university behind it. Recently, though, tax-wise, the gift annuity has become more favorable as a tool, so we may go ahead and apply for a gift annuity license."
But, at present, "we simply purchase the remainder interest at a bargain price. Let's say," Gilchrist continues, "that the property is worth $100,000. We might say to the donor, 'OK, we'll buy the remainder interest in the house for $70,000 and we'll give you an interest-only note at, say, 10%--that's $7,000 a year.'
University Makes Payments
"Then we ask them to take that note and place it into a charitable remainder trust. All that happens, really, is that now the university makes payments to the trust, which then passes the interest payments on to the donor. And, when the donor dies, the university gets the note back, as well as the house." About 20 such arrangements have been set up by Gilchrist in the past four years.
And rarely, according to Douglas Freeman, a West Los Angeles attorney specializing in charitable giving, is a tax consideration involved since the Internal Revenue Service's one-time, $125,000 exemption from capital gains tax applies (if the seller is 55, or older) just as it would in a more conventional sale.
More popular with USC donors at the moment, however, Gilchrist adds, is an arrangement where the donor no longer wants to live in the house--"or, it doesn't even have to be his principal residence, it's just another piece of real estate he owns"--and so they simply give USC the property.
"We then convert the whole thing into a trust income for them. Whenever you take a piece of real estate and put it into a trust and the trust sells it, there's no recognition of capital gains tax.
Converting Low Yield
"What we're doing, in effect, is taking a piece of property that's highly appreciated in value--but has a low or a zero yield--and converting it to a high yield for them without going through the trauma and expense of selling and without having it ravaged by capital gains. Plus, of course, a big charitable deduction is involved, too."
Why nonprofit organizations, particularly universities, are more receptive to this version of the Reverse Annuity Mortgage (RAM) than conventional lenders are, all hands agree, is because the institutions not only have a broad capital base--not subject to shareholder impatience at seeing money tied up for many years--but, because they are institutions, they can afford to play the actuarial waiting game.
The two points are the most frequent explanations for the disinterest among California's conventional lenders in marketing a commercial application of the RAM.
As Roger Meyer, director of planned giving for the UCLA Foundation, puts it: "In my way of thinking, the more people who move into California, the more difficult it is for me to see how residential property value can become depressed to any great degree. We're basing our annuities on present value gifts and, if you do enough of these, then you have the general law of averages moving into force.
Will Balance Out
"Some donors are going to live beyond their projected life span, and the value to the institution isn't going to be as great. But in time this will balance out to the institution's benefit and to the individual's, too, for as long as he lives."