Join us as we uncover the myths and misconceptions about reverse mortgages with Harlan Accola, reverse mortgage expert. Please tune in as Harlan talks about how a reverse mortgage can:
- be a massively productive retirement tool
- help reduce your tax burden in retirement
- eliminate housing expenses after age 62
- increase your assets and the legacy you leave to your family and loved ones
- hedge against loss in home equity – if you pass away and you owe more on the house than what it’s worth, you and your estate don’t have to pay it
Josh Mettle: Hello and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to advising physicians how to avoid financial landmines.
Today, we’re going to dive into a financial instrument that is so misunderstood most professionals in the industry don’t even understand it. I believe there is more misinformation and just plain-out ignorance about this product than any other financial tool I have ever studied, and a month ago, I’m not proud to say, I was as ignorant or more so than anyone. After 15 years in the mortgage industry, I truly had no idea what a reverse mortgage was, what it was capable of, and really couldn’t fathom that it could be a tool used to actually increase, not decrease, the amount of legacy assets or the amount of wealth that’s eventually inherited by heirs.
So today, we’re going to be talking with the man who set me straight and educated me on the HECM reverse mortgage program.
Our guest is Harlan Accola, and I think I said that wrong. I think it’s Accola — author, speaker, trainer, and reverse mortgage expert. Harlan has been advising clients on reverse mortgages for over 20 years and has personally guided over 1,000 clients through their reverse mortgage decision-making process. There are very few people in this country who have done that tremendous accomplishment. Harlan, without further ado, welcome to the show. How are you today?
Harlan Accola: Hey, I’m glad to be here. Always excited to talk about something I’m pretty passionate about, obviously.
Josh Mettle: Yeah, and I love that about you. There is not a lot of passion in the reverse mortgage industry and the reason I think you’re so passionate is because you truly understand it and you know what it can do for people, so let’s take a step back. Tell the audience just a little bit about your background and how you became a reverse mortgage expert over the last 20 years.
Harlan Accola: Well, I’ve done forward mortgages for really 20 years since 1996. About 13 years ago, I became aware of the reverse mortgage product, and I was negative about it like everybody and didn’t think it was a good idea. But, after I investigated it, I started doing it. In the beginning, I was just looking at saving widows that were older and had lost their husbands and didn’t have very many funds. As I was looking through this, I realized clearly that if something was done earlier in the game, all of these people would be better off and really this was a better financial planning tool to be used early not late.
Unfortunately, everybody is still kind of in the loan of last resort mentality, but fortunately we were able to understand that and see that about 10 years ago, and that’s where we really dramatically changed in working with financial advisors, attorneys, CPAs and so on in using this as a main piece of the architecture of putting an overall retirement plan together with a reverse mortgage tool.
Josh Mettle: Yeah, I tell you the things that shocked me was that it appears to me that the reverse mortgage product, especially the HECM product, is more advantageous to someone who is wealthy than to someone who is not wealthy in terms of the financial gains that are available, and it is more advantageous to take out at 62 than 82. Those were two things that were so counter to my understanding of the product (very little understanding) that I’m excited to dive deeper here with you today and talk about.
Harlan Accola: Yeah, that’s really the counterintuitive situation. There’s no question we can help people that are of modest means or are just kind of in trouble financially and it’s not that we turn up our noses at helping the widows or the older widows or people that have not saved as well. But there is no question that the vast majority of our clients, because we work with financial advisors, are the folks that don’t need a reverse mortgage but want one because it makes so much sense for their personal situation and their legacy for their children as well.
Josh Mettle: Yeah, and certainly our audience is more affluent. They’re going to be MDs and DMDs and other high-income professionals and financial advisors, so we kind of tailor this conversation to the more affluent consumer. I had the opportunity to attend a reverse mortgage training. You did a fantastic job, and one of the first things you did so well was to discuss the myths and all the things that we have in terms of misunderstandings. In my estimation, it’s the reason why so many people are tuned out from listening and learning about this product, so let’s start there. What do you identify as the top 3 to 5 myths that we should talk about upfront?
Harlan Accola: Well, I think the first thing is that everybody has a fear of loss and people think that you are losing when you get into reverse mortgage. You are losing control of your home. The title goes into somebody else’s name, the bank’s name, or whatever. You’re losing inheritance for your children. You’re losing equity. Those are things that I hear every time I speak anywhere.
What you don’t like?
“Well, I don’t want to lose equity. I don’t want to leave a debt behind for my children. I’m poaching into their inheritance, and so on and I just paid this house off. I want to give it to my kids, and I certainly don’t want to give it back to the bank.”
So, that fear of loss is such a big issue and the truth is that we always have to give up something to get something. There is no question that you will lose some equity if you do a reverse mortgage, no different than if you drew money from your 401(k) or your IRA. You’re going to lose some money out of there, but the fact is that with a reverse mortgage, while you give up something, you gain more. While you’re losing equity in your left pocket, you’re gaining cash and other assets in your right pocket.
The second myth is that this is just something we don’t need. We’ve got plenty of money. We don’t need it. We’re doing fine. What would we get a reverse mortgage for when we already paid it off and we don’t need one? It is true that there is a lot of things we don’t need, but it doesn’t mean that we don’t want them in order to make our life better, make our retirement better, make an inheritance to our children and the legacy that we pass on better. Most of the listeners to your podcast have no need for a reverse mortgage. Of course, we don’t need a car either but it’s awfully nice to have. We don’t need a cellphone, but it’s nice to have. That’s really the second thing that we run into with people. I don’t need one. Well, once you understand what’s there, you’re going to want one is the explanation that we usually have.
The third myth is that these are really expensive and there is no question that closing costs and the interest rates are a little bit higher on a reverse mortgage than they are on a forward mortgage, but the fact is this is just that anything that’s good is more expensive. I didn’t go around when I needed some medical attention. I didn’t go around and look for the cheapest doctor or travel to another country to find somebody that would do the procedure for less money. I wanted quality and that’s the same thing that you’re going to run into in any field, and so this costs more because it’s worth more. But there is a lot of factors that go into that.
Then just to kind of sum up all the other reasons why people just think it’s not a good idea or don’t do it is, there’s a lot of confusion and generally if somebody is confused about something that seems too technical or too complicated, they don’t look into it further an that’s not really a myth but something that holds people back and that’s why I’m so passionate about getting the education out there – because it will make a big difference in the planning that they do.
Josh Mettle: There’s no doubt that that confusion has caused an aversion to people listening and learning about this product and that’s why I’m so excited about this call today. Those are great. You did a really good job getting some of the myths out there. Now let’s move from myth to fact. Tell us about the three basics of reverse mortgages that is so well outline in some of your writings.
Harlan Accola: Well, the first thing is that any income that comes from reverse mortgage is tax free, so that will automatically send off all kinds of bells for financial advisors and for your clients. Because anything that’s tax free for people that are wealthy and have assets is a really important issue, especially when you go into retirement. More people die going down Mount Everest than climbing Mount Everest. Retirement is full of, as you very aptly mention often, any financial situation is such the landmine. There’s a ton of landmines in retirement, and avoiding those, one of the biggest landmines in retirement is taxes. Somebody says we’ll I’ve got $3 million. Well, not really. You only have $2 million because you’ve got at least a million dollars you’ve got to pay in taxes that as soon as you draw that money out. Tax free equity that comes from your home between 50 and 75 percent depending upon your age is the number one fact that we want to get out.
The second one is and this is very well documented by financial planning circles is that carrying a mortgage payment into retirement even if you can afford it is simply not a good idea and it will always sap your wealth and decrease your overall net worth, even if you say, “I have no problem making this $2,200 payment. It’s no big deal. I’m bringing in $10,000 a month.” It’s not a good idea and trying to create equity in retirement and not eliminate your monthly mortgage payment is a big mistake when you look at the facts and the research that’s been done.
The third thing is and one of the biggest fears that people have if what if I live too long and what if my home value goes down like what happened in 2008? I hear that all the time. With a reverse mortgage HECM, home equity conversion mortgage product, it’s guaranteed by the FHA Mortgage Insurance Program. If you pass away and you owe more on the house than what it’s worth, you don’t have to pay it. It’s paid for by the MIP fund. The rest of your assets on it, cover it. Your children don’t have to cover it. That non-recourse aspect because this is the only mortgage that’s owed by a house, not a person, your house owes the money and if your house doesn’t have enough money to pay for it at the end, your children or your estate aren’t responsible for it; FHA mortgage insurance is. But if it goes the other way and your home is worth $1 million when you pass away and you only owe $600,000, well then, the $400,000 will go to your children. If it’s good, it will go to your heirs. If it’s bad, the bill goes to FHA.
Josh Mettle: That’s right and you said the MIP fund and that’s the Mortgage Insurance Premium fund, so that covers one in the instance that the line of credit has grown, and we’ll go into this a little deeper, but the line of credit will grow annually and if it grows beyond the net worth of your home or the value of your home, there’s no implication for you as the borrower, who in that case maybe deceased, and there’s no implication for your heirs. I think that’s a very important point.
Harlan Accola: Well, it is because everybody, I don’t think there’s anyone that wants to pass on a debt to their children. They’re more concerned about leaving a legacy than of course the negative, and this is something that absolutely guarantees that that will not happen and that is one of the biggest single things that will prevent people from doing it because they say, “Where’s the protection?” Well, its protected by the mortgage insurance fund, which the US government would have to go out of business before that won’t work. That’s not a private company that guarantees that. That is the Federal Housing Administration.
Josh Mettle: Right. I was jotting notes as you were talking, the three biggest expenses I would imagine in retirement especially for the affluent has got to be taxation, potentially healthcare, and housing. With this product, you get either – eliminate wouldn’t be the right word, but drastically reduce two out of three of those expenses.
Harlan Accola: Yes. The order that it is, depending upon people’s wealth, it goes back and forth between taxes and housing. If someone has a net worth of $1 million or under, the biggest single expense in their retirement is going to be housing. If they have a net worth of $1 million or more, generally their biggest expense is going to be taxes. But always number 1 or number 2 is going to be housing, and there is no question that trying to pay too much for your house will dramatically affect your portfolio longevity, the amount of vacations that you’ll take, the legacy that you’ll leave to your children, so most people think that it is healthcare and it is the last couple of years. Statistically, you’re going to spend more money on healthcare in your last couple of years but over at 10-, 15-, 20-, 30-year retirement, housing is one of the single biggest factors, and we can not only dramatically drop that to only the cost of taxes and insurance but while we’re doing it, also reduce the tax burden as your clients are pulling money out of their IRAs and other deferred compensation programs that they’ve set up during their career.
Josh Mettle: Yeah, and we’re going to get into that deeper in just a moment because the question I’m sure in a lot of people’s minds is how does this have anything to do with taxation and we’re going to get there. Let’s go on to the next question, and I was still rather confused at this point in your presentation that I attended and the question that I was wrestling with as you were kind of giving us the big broad scope of the reverse mortgage is, how can extracting equity from my home, a potentially free and clear home, equate to greater net worth to pass on to my heirs. I just couldn’t figure that out. Tell us about the three buckets, which is just a beautiful way to illustrate this and of course the sacred cow of home equity.
Harlan Accola: Yes, I stumbled on this by accident because my own son asked me one day, “Dad, you and Mom aren’t going to do a reverse mortgage, are you?” That was about 6 years ago, and he was 16 years ago, and I figure if a 16-year-old can get this, then any of the rest of us can.
But I sat down to explain to my youngest son that day, just with three circles on a piece of paper. I said, “Isaac, here’s the deal. Circle number 1 is our income. Circle number 2 is our nest egg, our 401(k)s and our IRAs, and our life insurance, and all of our investments. Circle number 3 is our house. You need to understand, Isaac, that while we’re giving money to our financial advisor and we’re filling up bucket 2, our nest egg, by earning more money in bucket 1 than what we’re spending, that we’re going to have a nice little nest egg when it comes to retirement. But we are also depositing tens of thousands of dollars, really over the period of years, hundreds of thousands of dollars into our bucket 3, which is our house account. We’re paying the payments. We’re doing improvements or paying taxes and on and on, all the things that go into owning a home. It is a money drain during our earning years. And so just like it’s a money drain, to put money into a 401(k) or an IRA or whatever our investments are, that’s pulling money out of our income and depositing it somewhere else. Unfortunately, people look at the house as more of an expense than an asset, which it is during our earning years.
When we get to retirement, we now have the option as our bucket 1, our income goes down because we’re not working fulltime anymore, that we start automatically say we’ll just pull whatever money out of bucket 2, forgetting that we’ve dumped hundreds of thousands of dollars into bucket 3. What’s wrong with taking money out of there? Well, what’s wrong with it is for decades, especially since the Depression, people have been scared to death to take out their home equity. That’s considered the sacred cow and you just leave that sit and you pass on your house to your children free and clear. Even though your children – only 1 out of 100 children are ever going to move into your home. By the time you pass away, the kids are going to be 50, 60 years old. They don’t move into your house. They drive to the real estate office and sell it as quickly as possible so why are you trying to save that money?
I often ask people what is the purpose of your home equity?
“Well, it’s to pass on to my children?”
“Did you know your children didn’t want it? They’ll take the money certainly. They’ll sell your house and take the money, but that’s not the most efficient way to pass it on. You can best pass it on to bucket 2 much more efficiently because you have more control over it. It has higher returns generally. You can control the taxation better. There’s all kinds of things that are better done out of bucket 2.”
I said to Isaac that day. “When we retire, we’re going to start pulling money out of bucket 3, the sacred cow home equity, right away, because you and your brothers are not going to move into our home. And so, the bottom-line is that as we pull money out of bucket 3, guess what happens, Isaac, to bucket number 2? It goes up because we’re not killing the goose that lays the golden egg. That money is continuing to earn interest, continuing to get gains because we are not taking out of early retirement. In the financial planning world, they call that sequence-of-returns risk that if you properly pull the money out of your bucket 2 at the right time when the market isn’t down and when things are up, you will end up with a much larger amount of money based on standard deviation than if you don’t. And so the idea of pulling money strategically out of bucket 3 at tax free and leaving your money gaining in bucket 2, it will almost always, unless you are being irresponsible increase your net worth and thus increase your legacy to your children.
When I explained that to Isaac, it made a lot of sense to him because, quite frankly, you got to pull money out of some bucket to live because the only way of not pulling money out of bucket is to be dead, and obviously, none of us really want to check out early and hopefully our kids don’t either.
I have used this three-bucket analogy in a number of situations. It’s something that’s easy and quick and people just have to understand, clearly, that you have to take money out of some bucket, which bucket is the smartest bucket to take it out of. Emotionally, you don’t want to take money out of bucket 3. Logically, you should always take money out of bucket 3 first rather than let it sit there like it’s in a glass case in your living room something to look at and not use.
Josh Mettle: The piece that I struggled - and you illustrated that beautifully – the piece that I struggled with was if I’m going to extract money from somewhere, if I’m taking money out of the left pocket or I’m taking out of the right pocket, I’m still paying my living expenses. But here’s the big kicker. If I’m pulling bucket money out of bucket 3, which is your home equity, and I’m using that to cover my expenses, I’m doing two things.
Number one, I didn’t have to pull my mortgage payment out of bucket 2, out of my retirement account, so that retirement account can continue to compound for longer periods of time especially as you mentioned in times of a down market, that’s the last time you want to be pulling money out.
But number two, the second point is if I’m pulling money out of bucket 3, my home equity, rather than pulling money out of bucket 2, my nest egg, my retirement funds, then I’m not paying taxes. If I plan to be in a 25-percent to 30-percent tax bracket or some higher elevated tax bracket especially if you live in some place like California where you got a massive state tax on top of it, now I’m not pulling money out of my retirement account, paying taxes and then paying a mortgage payment. I’m leaving that, not paying a mortgage payment and I have the ability to extract equity tax free to cover my living expenses and that lets bucket 2 continue to compound. If I want to pull money out this year, great. If I don’t want to pull money out this year because it’s a down year, I don’t have to, but I have some freedoms. That was a massive realization for me.
Harlan Accola: Yeah, a lot of people just look at, they say, “Well, I can pull money out of my IRAs it doesn’t cost me anything, because obviously, you’re dealing with negative amortizing interest in reverse mortgage and that’s the argument is I’m going to have to pay a bunch of interest on that money. Well first of all, you’re not going to have to pay. Your house pays it a year after your death, so that’s very favorable terms, which is kind of an important thing to look at. But the issue is that it costs money to pull it out of bucket 2 also, because as soon as you pull it out bucket 2, you didn’t only lose $10,000, you lost everything that $10,000 is going to earn over the next 5, 10, 15, 20, 30 years. There’s a cost no matter where you get your money. You just want to pull it out strategically from the bucket that will preserve your net worth.
Wade Pfau, the Professor of Retirement Income at the American College has done a lot of research on this, and essentially what his philosophy is that you need to have, in retirement, an efficient, the most efficient withdrawal strategy. And so efficiently, you don’t pull everything out of bucket 2 and then go to bucket 3 or never go to bucket 3 at all. It’s a matter of retirement efficiency, spending the most money while you’re alive and still having the best legacy that you can leave behind.
If you take a look at life insurance, irrevocable life insurance trusts, all the different options that you have in bucket 2, it is so much easier to leave a larger legacy while you’re maintaining a higher cashflow during retirement that it just doesn’t make sense to leave that home equity locked up in bucket 3.
Josh Mettle: Yeah, great point. At this point, Harlan, I think we’ve given people a lot of interesting content and it’s very theoretical. What I’d like to do is try and add some reality to the conversation and I want to kind of illustrate this via a case study and this is loosely based on a recent client that you were able to help. This is a client that was winding down his practice and preparing for retirement. His reduced time in the practice would reduce his income, which he wanted to replace with the tune of about $7,000 a month. This client had approximately $3 million in liquid retirement funds, affluent client, had a $600,000 home with a $100,000 mortgage owing on it, and you proposed or the loan officer you’re working with proposed a reverse mortgage to help supplement that $7,000 a month that he wanted to use to offset his loss from reduced practice time. In the end, he ended up saving in taxes, extending the life of his assets, and it was a home run for this client. Just kind of walk us through this case and explain the different ways that it benefited him financially.
Harlan Accola: Sure. First of all, realize that he was completely opposed to the reverse mortgage because anybody that’s got $3 million in retirement funds and a couple of BMWs in the garage really is almost always insulted that we suggested a reverse mortgage, but fortunately, his financial planner was aware of the advantages, and so he agreed to listen to the whole program and now he’s really kind of turned around from very skeptical and almost upset to a raving fan, because of what his accomplished.
Josh, to go back on this, what you really need to understand with a reverse mortgage is it’s kind of a like a Swiss army knife. Don’t confuse it with a regular mortgage because regular mortgage just has monthly payments. All of them do. A reverse mortgage has three tools: you can get a lump sum chunk out of your house; you can get a monthly payment out of your house, kind of like a 10-year annuity payment, or you can set up a credit line. In this case, we used all three things for this client.
And so, he had a $600,000 home, still owed $100,000 on it, so he’s eligible because he’s early in retirement. He’s only eligible for about some $300,000 round numbers, and so we paid off his $100,000 mortgage in a lump sum, eliminated his mortgage payment. Obviously, he can afford it but it doesn’t make any sense to continue to turn cash into equity when you no longer need to, especially with the tax situation that he’s in.
By the way, everyday says when you retire, you’ll be in a lower tax bracket. Most of your clients and listeners to this podcast understand that’s not really the case when you have money. You’re in a lower tax bracket when you’re broke and you didn’t put money away. Obviously, he’s understanding, “I’ve got to worry more about taxes now than I ever did during my work life because I’ve got this $3 million sitting here, most of it is deferred income in an IRA and 401(k).”
The second thing we did is he didn’t want to draw social security yet because he has a lot of longevity in his family, so we wanted to keep his income about $7,000 a month, so we pulled out roughly $3,000 a month out of the house, somewhere around $30,000 to $40,000, close to about $40,000 a year.
Then what we also did, to take care of things like when he wants to buy a car, when he wants to go on vacation, they’re planning to go on a river cruise, we set up a line of credit with the other $100,000. We’re pulling the $3,000 a month out so the next roughly six years until when they get to 70. And when they get to 70, of course that’s a big deal because now they’re for sure going to take social security if they don’t take it before. And they’re going to then be required to take required to take Required Minimum Distributions. They’re going to pull some money out of their IRA to supplement the rest of their income, but they’re going to do it to stay in the lower tax bracket usually below 25 percent, most of the time as low as 15 percent.
We used all three tools. We used a lump sum to pay off their existing mortgage and wipe out the need to pull out $2,000 a month. Secondly, we gave him $3,000 a month in income, so they don’t have to draw social security yet. And then, thirdly, we gave him a line of credit of roughly $80,000 to make up the difference for the things like purchasing a car, going on vacation, whatever, without having to draw out for those unscheduled things out of the retirement accounts.
Now, when he gets to 70, there’s a lot of interest built up because he hasn’t been making payments for a long time. Assuming the interest deduction is still intact and tax laws are similar, what the plan will be then is to start drawing money out of his IRA, which will be bigger than $3 million, most likely, and making payments on the house on the reverse mortgage that he does not have to make, which will be able to save him money in taxes because he will get tax deductions for the hundreds of thousands of dollars in interest that he has never paid.
When he does that, he will increase his credit line and be able to draw all of that money back out again as tax-free income from his reverse mortgage. The financial advisor that we worked with figures that he’ll save somewhere between $120,000 and $150,000 in the first 10 years of retirement by using these strategies.
The closing costs on this loan were roughly $20,000, very insignificant. It will mostly be saved in taxes within the first couple of years. While in the more expensive tool, yes, it is. but he didn’t have to write a check for the $20,000. We took that out of equity and it’s due a year after his death. That’s a whole lot of issues in one scenario.
And I’m sure that there’s a lot of your listeners that say, “Well, just a minute. How does that work? How does that work?” It’s very necessary that they sit down with you and with a financial advisor that really understands this stuff, because this is a lot of moving parts and it affects social security. It affects taxes. It affects cashflow. It affects legacy. There are so many things that the reverse mortgage can do and that’s why we always refer to the Swiss army knife tool. It’s not just one blade. It’s a little corkscrew to open the wine bottle to take care of vacations. It’s a little scissors to trim taxes. It’s the knife to make sure that you’re slicing things accordingly into what you want and need for income. It can do so many things other than just eliminate the payment on your home.
That’s just a very quick example of one scenario; not all of them are homeruns like that, but most of them have a very similar effect on those that are wealthy and affluent and wondering, “I wish I wouldn’t have to give all this money back in taxes.”
Josh Mettle: Well that was definitely a homerun for that client. I just want to make sure tactically people understand. You were able to extend his draw on social security. You were able to reduce the amount of money that would come out of bucket 2, his 401(k)s, IRAs, and let that compound for another 7 to 10 years at a higher rate. You were able to reduce his taxes because he now didn’t have a mortgage payment and he had $3,000 of monthly income, so instead of pulling that money out of the retirement accounts and then paying taxes and then paying those costs, he didn’t have to pay any taxes. During that whatever it was 7- to 10-year period as he was drawing money out, he accrued interest.
Now here’s the beauty. When you take that distribution at 70, and you have to take that distribution, one could utilize that money to pay the interest down on the reverse mortgage that is accrued. Then a month later, a week later, they could write themselves a check out of that equity line and re-put that money into a bank account. Therefore, almost washing that money and being able to achieve its benefit or use without paying taxes on it.
Harlan Accola: Yes. We’re making a lot of assumptions there and I want to be careful to put in the disclaimers that as you have as a mortgage loan originator, we cannot give tax advice but what they need to understand is that every time they make a payment back to their reverse mortgage, they get a 1098 for the interest that is paid. That is very significant in tax planning and as soon as you explain that to your CPA, they will immediately see where the opportunity comes in here. We have no idea what the tax laws are going to be next year, to say nothing about 7 to 10 years from now, but that’s just the icing on the cake.
The best thing is we were able to decrease the amount of money that’s being pulled out of his IRA so that we mitigate the tax scenario right now, so that the legacy part is growing there. That’s the part that he’ll probably never spend. Likely if he lives to be in his 90s, he will spend all of the equity money in his house and his house equity will be all gone, but that’s okay because now whether we got the tax benefit or not, we were able to save much more on the other end and then the big thing is that now this is a great situation from an inheritance scenario because depending upon life insurance and the tax deduction that we’re leaving behind for the children makes a dramatic difference.
Josh Mettle: Let’s go full circle. Let’s talk about what happens to the property when he eventually passes away and talk to us a little bit about the potential inheritance benefits his heirs could expect.
Harlan Accola: Yeah, there is a very famous tax attorney. As long as we’re touching on tax situation, then take advice from him not me because he spent his life analyzing IRS codes, which I get a little bit bored just filling out my information for the 1040 that I’m giving my CPA. But Barry Sacks is a very knowledgeable person on reverse mortgages and has written a white paper in the Journal of Taxation called, The Lost Deduction. This is a deduction that gets passed on to your children. Let’s say for example you pass away and you got $1 million home when you pass away. That’s what the value is and you owe $1 million on it because you haven’t made any payments and you kept doing this, using the money out of there and there is more money sitting obviously in the other side.
What now happens is the children sell the house, and as long as it’s set up properly in the estate plan that the children are the owners of the house and have the authority to sell it, the children receive, let’s say there was $700,000 worth of interest that’s accrued over a period over the last 25 years to 30 years. The children get the benefit of that $700,000, which will go against any inheritance on an IRA or any other distributions that they’ve taken, that are being taken once you pass on the assets to the children.
Not only can this be a help tax-wise during the lifetime of your client, but the client’s children once they understand this, encourage their parents to spend all the money in bucket 3 and leave them more in bucket 2 because it simply makes more sense from building family wealth multi-generationally. It’s just simply a smart way to do it.
What I always tell people is just because you can afford something doesn’t mean that you should get it. Just because you can afford to pay your house off, other than feeling good about having a bunch of sacred cows in home equity in your home, you really didn’t accomplish as much for yourself during your retirement and as much for your children and the multigenerational legacy that you’re passing along. And so, that’s really kind of, when you look at the whole situation, there’s so many people that, “I don’t want to do this because I don’t want to hurt my kids.” You’re not hurting your kids. You’re helping your kids because the net worth is going up not down; the legacy is going up not down, and that’s the tool that you want to use. They’re simply more efficient.
You know, with most of your client being physicians, they certainly have seen over a period of their lifetime more efficient and smarter ways of using tools, of using drugs, of using their resources to help patients with better outcomes. I remember when open heart surgeries were this huge risk thing and now they’re almost kind of commonplace. That’s the situation that, there’s more tools, there’s more understanding of what’s there. That’s really what’s going on in the financial world. This is a product that is evolving to make a dramatic difference to create more wealth not to take wealth away and that’s why I’m so proud and enthusiastic to be a part of it. Because not only does it make a difference in the lives of my clients, it makes a huge difference in the lives of their children, and sometimes they appreciate more what I have done for the next generation than what I have done for them.
Josh Mettle: Powerful. Hey, I want to make sure we do a link to that article because I think that Barry Sacks’ article is going to be key for people to understand the taxation piece with inheritance. Tell me again the name of that article.
Harlan Accola: It’s called The Lost Deduction and I’ll send that over to you, and it was in the Journal of Taxation, and Barry Sacks is the author, a tax attorney from California.
Josh Mettle: Great. We’ll embed a link in the program notes so that folks could find that easily. Well, Harlan, I want to thank you for your time and for sharing so generously with us. I would like to just allow you to close this out. If you had any final thoughts or anything else that you wanted to share with us in closing and also if you would, if there is a place that you advise clients to go for additional information or a way to contact you, feel free to mention that as well.
Harlan Accola: Sure. Well, there’s two things. I know that there’s so many things that I can think of that we could have, should have talked about but we could go on for 3 hours and we could still forget some things. We didn’t even touch on the long-term care issue. That’s one of the biggest problems facing not only families but our entire country. This is something that’s very instrumental in life insurance and long-term care, legacy issues to make sure that is not something that comes out of the other assets. That probably should be another program. We can talk about just the long-term care issue for a half hour because that’s something that’s very near and dear to my heart because both of my parents were helped with the reverse mortgage because when they have long-term care issues and my dad had a stroke and mom ended her life with Alzheimer’s. That was a very difficult situation personally, but from a financial situation, it was much easier because we had things set up with the reverse mortgage.
The whole long-term care thing is something that we should talk about in the future because that’s really why I’m in the business, quite frankly, because of what it did for my family. But one of the best things to do is there is very few people in this country unfortunately have a positive view and even those they have a positive view don’t really understand it, much more reverse mortgage.
At Fairway Independent Mortgage, where I work with our loan officers, we have a nationwide group of folks all over and if somebody wanted to just call us at (715) 389-8800, our office, we can put them in touch with someone anywhere in the United States that could help them find out whether or not this is something that makes sense for them.
Josh Mettle: Harlan, thanks, buddy. I appreciate you sharing with us and we look forward to having round 2 and we’ll talk a little bit more about long-term care at our next meeting.
Harlan Accola: Thank you. I appreciate the opportunity to get the news out. It’s so valuable and we appreciate you giving us the platform.