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3 ways retirees can create a cash cushion

Dear Benny: I read your recent column regarding bridge loans.

I would like to look into a bridge loan for my parents, who are both in their 90s. They have moved into an independent-living community and are almost out of money and their home of 61 years will not sell.

Who do I call to get a bridge loan? It’s the only way they will be able to stay where they are because they are cash-poor.

I hope you can steer me in the right direction. –Beth

Dear Beth: A bridge loan is generally a loan to help a consumer buy another home before the old home is sold. When the old home is sold, the bridge loan is paid off. In effect, the loan is a “bridge” between the two houses.

So I don’t think you are referring specifically to a bridge loan. I see three possible alternatives. First, see if your parents can get a home equity line of credit, called a HELOC. I assume their house is free and clear of any mortgage. Talk with your local banker about this.

Second, they may be a candidate for a reverse mortgage. Generally, you have to actually live in the house to be eligible, but I understand that some lenders are willing to make the reverse even if you are renting the house.

Third, perhaps you can buy the house, have your parents take back a promissory note and secure the loan with a deed of trust (the mortgage document). You can pay the note off monthly — with interest — and this way your parents will have a steady income. And if they have lived in the house for two years out of the five years before you buy it, and file a joint income tax return, they can exclude up to $500,000 of the profit they will make on the sale to you.

Dear Benny: I live in Chicago and read with interest one of your recent columns in which an individual wanted to purchase a house for his aunt and avoid a huge tax bite. You asked for suggestions as to how this might be accomplished, and I believe I have a method that might work.

The method I suggest requires a little planning. The writer should create a Nevada corporation, of which he is the sole officer and shareholder. He should also create a limited partnership, of which the new corporation is the general partner (with a 2 percent interest) and of which he is the limited partner.

When the nephew buys the house, he should put the property into the limited partnership. Every year thereafter, the nephew should give his aunt a “gift” of a percentage of his limited partnership interest that equals the gift limit the IRS will allow without a tax consequence (currently $13,000).

Every year, the aunt receives a tax-free gift equal to a percentage of the value of the house and does so without paying any taxes. The house is protected from creditors of both the nephew and the aunt, and after eight years the aunt owns the home. –David

Dear David: I have never heard of a Nevada corporation, so I did a Web search. Apparently, Nevada is a popular state — like Delaware — for creating corporations. However, many of the websites also urged caution, because if you do not do it right, there will be tax consequences.

I don’t see why one has to set up a corporation. The nephew could just buy the house and gift a percentage of the house each year to his aunt.

So long as the percentage does not exceed $13,000, which is the maximum one can gift to anyone without any tax consequences, ultimately the aunt will own the entire house.

Don’t do any of this before consulting with your tax and legal advisers.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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