Universities Encourage Charity That Begins With Home

We don’t need to belabor the point that “charity begins at home.”

But in the 1980s it may be equally true that charity begins with the home.

That’s the message that California’s colleges and universities are trying to convey to the state’s elderly homeowners in promoting a form of mutual backscratching that has been around as long as the institutions themselves have.

To date, however, it remains a virtually unknown arrangement: giving your home to a nonprofit institution, but retaining physical possession of it and generating an income stream at the same time.

“It’s the sort of program that can serve the same purpose as the reverse annuity mortgage--letting the homeowner unlock his equity,” according to Peter Wakeman, Pepperdine University’s director of planned giving and university affairs legal counsel. “It’s a goal that commercial institutions--for one reason or another--are unwilling or unable to meet.”

While the reverse annuity mortgage (RAM) offered through conventional lenders has had limited success in the Northeast under the promotion of Mt. Laurel, N.J.-based American Homestead Mortgage, efforts to enlist California lenders in comparable ventures have been unsuccessful.

This despite the ripeness of the market here: More than 1.5 million homeowners over the age of 65,with a high percentage of them needing additional income and sitting on housing that has exploded in value tenfold--from a median price of about $13,800 for a detached, single-family home in the mid-50s to a median price of $137,117 last summer, according to the U. S. Department of Commerce.

A fortune in home equity that, conventionally, can be tapped by the aging homeowner only by selling his home.

“I see it, though,” Wakeman says, “as our major growth area--not just for Pepperdine, but for every other nonprofit institution as well. The days are gone when universities could look to cash sources only for gifts--they’re getting few and far between.

“There’s been a big increase in institutions looking for a decreasing pool of dollars. I think that we all have to look at other sources of funding for charitable purposes and, certainly, the equity in homes is not only a big one but one that’s new and largely untapped.”

The private, Malibu-based liberal arts university established in 1937 by George Pepperdine, founder of Western Auto Supply Co., operates on an annual budget of $75 million and is in the third year of a five-year campaign to raise $100 million, of which between $65 million and $70 million is already in place.

Like the other public and private universities contacted by The Times, Pepperdine “has not been too active” in utilizing home equities as a form of charitable giving--”maybe a half a dozen in the last two and a half years,” Wakeman estimates.

“But it’s in its infancy, and as the population ages, institutions are going to become more and more active and creative in fields like this. And we like to think that Pepperdine is going to be a leader in this new approach.”

Equally optimistic about the future of tying charitable giving into the home equity market is Roger Meyer, director of planned giving for the UCLA Foundation.

“I don’t think it’s so much a matter of old sources of funds drying up as it is a matter of greatly increased needs by the universities. There’s certainly no hesitancy on our part about going into it, and we’ve certainly been trying to encourage it more, but it’s primarily a marketing problem.”

Which mirrors Wakeman’s complaint that “most lawyers and estate planners still know very little about it . . . there may be a dozen attorneys, nationwide, who specialize in charitable giving and are familiar with this technique.”

While there are a number of variations on the same theme, the technique referred to basically hinges on a legal separation of the property into a “life estate,” or the right of the donor to continue living in the home, and the “remainder interest,” or the institution’s right to free title to the residence when the donor(s) die.

“For instance,” Pepperdine’s Wakeman says in illustration, “Mr. and Mrs. Wilson are 70 and 65 years old, respectively. Assume their residence is independently appraised for $250,000, with the house and land each comprising 50% of that value, and there is no debt against the property.

“The Wilsons live on a fixed income of $2,000 per month but wou them to travel. They want to continue living in the house, and their children are capable of providing for themselves.”

At this point, the arrangement with the university is put into place and, according to Internal Revenue Service actuarial tables, the value of the Wilsons’ life estate is established at $202,223 and the value of the university’s remainder interest is $47,777, and that represents the value of the Wilsons’ charitable contribution.

Based on this $47,777 gift, the university pays them a monthly annuity for the rest of their lives and, on the basis of their respective ages--and on rates established by the New York-based Committee on Gift Annuities, a fair annuity rate of 6.9% is established. As result of the $47,777 gift, a monthly payment of $275 is made for the rest of their lives.

(The Committee on Gift Annuities is a curious offshoot of the American Bible Society which, beginning in 1927, began counseling church groups on the fair rate of return to be paid to members deeding property to them under an annuity arrangement.

(Sponsors of the committee--about 1,300 nonprofit organizations, such as colleges, universities, hospitals, nursing homes, foundations and other religious organizations, as well as a scattering of individuals active in charitable giving--meet every three years and draw up the actuarial tables that virtually all nonprofit groups use in standardizing annuities.)

“What the Wilsons have done,” Wakeman says, “is increase their income by $275 a month, thus unlocking the equity in their home; they’ve retained the right to live in their house for the rest of their lives if they choose to do so; they’ve made a contribution to their favorite charity in excess of $20,000, and they’ve removed a sizable asset from their probate estate, thereby reducing the estate expense to their heirs.”

But there are other ways to skin the same cat.