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#161: Using a reverse mortgage to make gifts ahead of sunset


While your career earnings and savings have enabled the two of you to accumulate a very respectable net worth, you have not needed to worry about federal estate taxation.  However, you’ve become aware that unless Congress acts before the end of next year (you don’t have a lot of confidence in Congress’ ability to act, given recent developments), the estate tax exemptions will revert to where they were in 2017. If that happens, your estate could be vulnerable to a tax as high as 40%, since a great deal of your wealth is in the form of real estate properties.

You know there are tactics involving a family limited partnership, but you would prefer to keep all the real estate in your own joint name while you are both alive, and you have resisted converting your IRAs to Roth IRA accounts.

You have been discussing with your estate planning attorney the idea of taking greater advantage of annual exclusion gifts to children, grandchildren, and even to other potential heirs.

One choice about which you are both enthusiastic is, next year, funding five years’ worth of annual exclusions by Pre-funding 529 Plans for each of your three grandchildren (who are now in high school or beginning college).That would mean contributing $170,000 for each grandchild in 2024, essentially half a million dollars. The issue would be liquidity, with taxable withdrawals from qualified plans and loans against real estate holdings being the only two possible sources for that level of funding.

Consider accessing the wealth you’ve established in the form of your own home equity to pre-fund those 529s for the grandkids. With a reverse mortgage set up as an equity line of credit, whether or not Congress makes its move to avoid the “sunset”, you will have put in place a flexible strategy, allowing you to avoid taxable withdrawals from retirement accounts while keeping your real estate holdings lien-free. Whatever portion of your credit line has not been used will be guaranteed to grow at the same rate as the interest being charged on the loan.

“Proactive” gifting in the face of a possible estate tax exemption sunset can prove to be a valuable strategy, but with a reverse mortgage, you’ll have established a management tool  no matter the near term outcome on the Congressional front.

If you’d like to see what you might qualify for with a reverse mortgage in Indiana, or to download your Reverse Mortgage Guide Click Here (and scroll down).

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Consult a tax advisor. Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.