CCIM Feature

Cash Flow in Retirement: Reverse Mortgages or a Retained Life Estate

This is the ninth article in a series on real estate gifting. Real estate professionals and their clients should consider all options when discussing the charitable donation of real property. Real Estate Gifting Realized, a new program launched by the CCIM Foundation, facilitates the donation of real estate to charitable organizations. A donation may be made directly to the CCIM Foundation or the Foundation can assist with the donation to a chosen charity.

Retirement Cash Flow

The aging baby boomer generation is living longer than earlier generations, resulting in a need for additional cash flow in retirement. Many financial planning articles suggest the use of standby reverse mortgages where an individual can draw down on a line of credit, using it as a buffer to avoid selling other investments when they have fallen in value. Since home equity is estimated to be between 45 percent and 75 percent of net worth for the median household approaching or in retirement, this is a way to preserve retirement account balances.

Another option, for those who have a philanthropic desire, is the retained life estate structured with a tenant lease, sale of the remainder interest to the charity for a lump sum, or combining the retained life estate with a charitable gift annuity to generate monthly cash flow.

Reverse Mortgages

Reverse mortgages allow homeowners who are at least 62 years old to borrow against their home equity. The primary reverse mortgage program today is the Federal Housing Administration’s home equity conversion mortgage. On September 30, 2013, the HECM Saver product was discontinued. HECM now comes with two levels of upfront mortgage insurance premium. If first year draws exceed 60 percent of the available funds, the MIP is 2.5 percent. If first year draws are 60 percent or less, the MIP is only 0.5 percent. Each borrower will have unique needs, but keeping the first year draw under 60 percent will result in significant savings on MIP. All available funds may be drawn after the first year without restriction. Upfront costs to obtain a reverse mortgage are similar to those for the typical mortgage: title insurance, appraisals, attorney fees, and MIP. There may be other origination costs, depending on the lender.

Reverse mortgages are nonrecourse loans. When paid off, the money due is the lesser of the accrued loan balance or the then-current home value. Any deficiency is made up by HUD’s insurance pool and any surplus goes to the borrowers or their heirs.

With reverse mortgages, borrowers still own their homes and are responsible for property taxes, homeowner’s insurance, and home maintenance. Because a certain portion of borrowers do not keep up these expenses, beginning in January 2014, HUD started to require that lenders perform financial assessments on borrowers. If it appears that a borrower may not be able to keep up with these expenses, HUD will require a lifetime set-aside to be held back from the initial loan.

As is evident, using home equity in this way is one option for an individual to generate cash flow in retirement. An individual interested in a reverse mortgage can get advice from a HUD-certified reverse mortgage counselor. A directory of reverse mortgage counselors is available at, under “Talk to a Housing Counselor” on the home page.

Retained Life Estate

Another option to generate cash flow is a retained life estate if the owner chooses to rent out the property, sell the remainder interest to the charitable organization, or seeks to combine it with a charitable gift annuity.

A retained life estate allows a donor to claim a charitable deduction at the present time for the gift of the remainder value of real property donated to charity. The transfer of a personal residence, second home, or farm qualifies for a retained life estate. The charitable income tax deduction for a retained life estate is an amount equal to the net present value of the remainder interest contributed to charity. The computation is performed under Internal Revenue Service guidelines based upon, among other things, the fair market value of the property on the date of transfer, its estimated useful life and salvage value, the term of the agreement, and a defined federal rate.

A retained life estate allows the donor to deed property to a charity and reserve the right to live in or use the property for a term of years or life. Rights and responsibilities are documented in a life estate agreement. The donor must maintain the property, pay property taxes, insure the property against loss and liability, repair the property if damaged, and avoid placing liens or encumbrances on the property without the permission of the charity. In retaining rights, the donor has the option to lease out the property for a source of income or sell the remainder of the life interest to the charity for a lump sum.

In some instances, it also may be possible to combine the retained life estate with a charitable gift annuity to generate cash flow. This is generally a technique for older donors who have property that is debt free. The charitable retained life estate agreement is combined with a charitable gift annuity. This combination enables a donor to contribute the remainder interest in the personal residence to charity, retain the lifetime use of the property, receive income and receive a current income tax charitable deduction.

First, it’s necessary to calculate the present value of the remainder interest in the residence. Instead of contributing the entire remainder interest to the charity, the donor transfers it as consideration in exchange for an immediate or deferred payment charitable gift annuity. Annuity payments are based on the contributed remainder interest with a portion of it qualifying as a charitable contribution and income tax deduction. Annuity payments come from other sources of the charitable organization, exclusive of the contributed remainder interest. Because of the need for the annuity payments to come from other funds, not all charitable organizations are able to provide this option to donors.

The rules on charitable deductions to qualified charities require review at the time a charitable donation is contemplated. These rules may change or be impacted by amended regulations, current tax court decisions and case law.

Mary Stark Hood, JD, CFP, is president of the Hood Group, which provides consulting services to business organizations and foundations. She currently serves as a consultant to the CCIM Foundation’s Real Estate Gifting Realized Program. Contact her at Learn more about the Foundation’s gifting program at


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