That very old expression, “you can’t make a silk purse out of a sow’s ear” seems sensible at first. Something from nothing is impossible alchemy. At least, that’s what we’ve been told. There are some circumstances, though, where it is possible to defy conventional wisdom and create something from almost nothing.
In the last week I’ve been involved in two separate client matters where we are literally creating cash flow from “air”. Let me explain so that you can see the opportunity that awaits. Our client is an eighty-five-year-old widow who lives in a $1 Million condo in California. She’s healthy and active and truly wants to continue living where she is. Her asset base is limited, and her condo expenses are rising, and she would like to find more cash flow to ease some of her stress. For many who analyze these facts and circumstances there doesn’t seem to be a viable solution that doesn’t involve selling her condo and moving to a less expensive place.
There is a solution, however. It requires a combination of two gifts. The first step is for our widow is to enter into a retained life estate agreement with a charity. This is a simple transaction that essentially says, “I’m giving my property to charity but not until I die. Until then, I retain the right to live there and will continue to pay all of the expenses.” Because of this, our widow will be entitled to a large charitable income tax deduction based on the value of her condo, her age and several other factors. In her case the tax deduction is $775,000. However, because of her relatively small income, she really can’t take advantage of the income tax savings the deduction would create.
Here’s where it gets interesting. In step two, we allow our widow to transfer her income tax deduction to a charity in exchange for a Charitable Gift Annuity. Since the tax deduction is a right in property, it is transferable. The $775,000 “gift” will result in a gift annuity payment of $67,500 per year for the widow. For simplicity’s sake, we call this gift the LEGA-C™ plan (Life Estate Gift Annuity Combination)
Nothing about our widow’s day to day life has changed except se now has $67,500 more per year to help her enjoy her life. Not exactly something from nothing. But pretty close. Contact us today for more information on how we can help you identify cash flow opportunities!