Page 1 - Case Study_Strategic Use of the HECM

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CASE STUDY:

Strategic Use of the

Home Equity Conversion

Mortgage (HECM) Loan

Avoiding the realization of capital gains

in highly appreciated stock positions.

Problem Challenge Solution Result

Retirees using their Retirees are facing a Refinance their 30-year Action reduced the
dividends and hefty tax bill. mortgage with a Home need for liquidating

occasionally selling Equity Conversion capital gains-sensitive
stock positions as Mortgage (HECM) loan. stock positions.

supplemental income.

Problem

In addition to William and Due to the low-cost

Lorraine’s pension, social basis of these positions,

security income, and they are often stuck paying

required distributions from significant capital gains

their IRAs, they have been taxes each time they sell,
putting alarming cracks in
using their dividends and their retirement nest egg.

occasional selling of stock

positions to supplement

income. They are also concerned

about the risks associated
with the concentration of
their current assets, leading

them to look for ways to
reduce this exposure and

become more diversified.

Challenge

William and Lorraine own a home worth $1.15 million with
an outstanding loan balance of $183,000. They would like to
complete a few home-renovation projects but have been

reluctant, due to their capital gains exposure from selling some
of their stocks.

The challenge that William and Lorraine face is not uncommon.
Advisors are solving these issues using various strategies

including liquidating and spreading the gains over time, using
a securitized line of credit, or perhaps implementing charitable
strategies to offset income gains elsewhere. In any case, the

retirees are facing a hefty tax bill.

Solution

Refinance their 30-year

mortgage with a Home

Equity Conversion

Mortgage (HECM) loan.

Result

The couple was able to refinance their existing

30-year mortgage with a government-insured
Home Equity Conversion Mortgage (HECM) with
a line of credit feature. In doing so, they created

the option of if, when, and how much to apply
toward their mortgage payments.

This action reduced the need for liquidating their

capital gains-sensitive stock positions. In addition,
they were able to use the line of credit for home
renovations without incurring any tax liability.

Looking down the road, their line of credit will grow at the same

rate being charged on any outstanding balance, creating a pool of
resources should they need additional liquidity for future expenses,

such as travel to visit their kids, in-home care, or any other expenses.

With this added flexibility, William and Lorraine
don’t expect to liquidate any more stock,
allowing it to grow as a future inheritance for

their children.

Under current law, upon their passing, they will receive a step-up in
basis, eliminating what otherwise would have likely been a sizeable

and taxable capital gain. This will provide savings to the surviving
spouse or heirs, valued well beyond the expense of the line of credit.

Perhaps most importantly, William and Lorraine
are relieved of the stress of having to write

checks to the IRS to meet their ongoing income
needs.

The Full Story

William and Lorraine, ages 78 and 79, have been working with their advisor for over 20 years. One of their primary
assets is a portfolio of three stock positions valued in excess of $1.2 million with a cost basis under $120,000.

In addition to their pension, social security income, and required distributions from their IRAs, they have been
using the dividends and occasional selling of positions to supplement income. Due to the low-cost basis of the

positions, they are stuck paying significant capital gains taxes each time they sell, diminishing the size of their
retirement portfolio. They are also concerned about the risks associated with the lack of diversification in their

portfolio. They own a home worth $1.15 million with an outstanding loan balance of $183,000. They would like to
complete a few home-renovation projects but have been reluctant, due to the sizable capital gains expense they

would incur if they sell some of their low-basis stocks.

The challenge that William and Lorraine face is not uncommon. Advisors are solving these issues using various
strategies including selling and spreading their stock gains over time, using a securitized line of credit, or perhaps

implementing charitable strategies to offset income streams elsewhere. In any case, they are facing a hefty tax bill.

It was after hearing about the HECM Line of Credit and engaging our advisory team that the ideal solution was
designed. The client was able to refinance their existing 30-year mortgage with a government-insured Home

Equity Conversion Mortgage (HECM) with a line of credit feature. In doing so, they created the option of if, when,
and how much money, if any, to apply toward their mortgage payments. This one strategy alone reduced the

need for liquidation of their stock positions. In addition, they were able to use the line of credit for key home
renovations without incurring any tax liability.

Looking down the road, their line of credit will grow at the same rate being charged on any outstanding balance,

creating a pool of resources should they need additional liquidity for future expenses, such as travel to visit their
kids, in-home care, or any other expenses. With this added flexibility, they don’t expect to liquidate any more

stock. Under current law, upon the passing of William and Lorraine, they will receive a step-up in basis, eliminating
what otherwise would have likely been a sizeable and taxable capital gain. This strategic use of a reverse

mortgage line of credit will provide a significant savings to the surviving spouse or heirs, valued well beyond the
expense of the line of credit. Perhaps most importantly, William and Lorraine are relieved of the stress of having to

write checks to the IRS to meet their ongoing income needs.

For industry professionals only – not intended for distribution to the general public.

NMLS# 9392 (www.nmlsconsumeraccess.org). American Advisors Group (AAG) is headquartered at 18200 Von Karman Ave., Suite 300, Irvine, CA 92612. AAG conducts business in the
following states: AK (Alaska Mortgage Broker/Lender License No. AK9392), AL, AR, AZ (BK_0911141), CA (CA Loans made or arranged pursuant to a California Finance Lenders Law license
(603F324) and Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act (4131144)), CO (Regulated by the Division of
Real Estate; to check the license status of your mortgage loan originator, visit http://www.dora.state.co.us/real-estate/index.htm), CT, DC (District of Columbia Mortgage Dual Authority
License No. MLB9392), DE, FL, GA (residential Mortgage Licensee #22849), HI, IA, ID, IL (Illinois Residential Mortgage Licensee; Illinois Commissioner of Banks can be reached at 100 West
Randolph, 9th Floor, Chicago, Illinois 60601, (312)814-4500), IN, KS (Kansas Licensed Mortgage Company MC. 0025024), KY, LA, MD, ME (SLM11356), MI, MN, MO (4824 NW Gateway Ave,
Suite 201, Riverside, MO 64168), MS (Licensed by the Mississippi Department of Banking and Consumer Finance), MT, NC, ND, NE, NH (Licensed by the New Hampshire banking depart-
ment), NJ (Licensed by the N.J. Department of Banking and Insurance), NM, NV, NY 58 South Service Road, Suite 210 Melville, NY 11747 (Licensed Mortgage Banker-NYS Department of
Financial Services; American Advisors Group operates as American Advisors Group, Inc. in New York.) LMBC 109396, OH (RM.850159.000), OK, OR (ML-4623), PA (Licensed by the Pennsylva-
nia Department of Banking 28356), RI (Rhode Island Licensed Lender), SD, SC, TN, TX (Mortgage Banker Registration, 9601 Amberglen Blvd, Suite 260 Austin, TX 78729), UT, VA (Licensed by
the Virginia State Corporation Commission MC – 5134), VT (Vermont Lender License No. 6384), WA (Consumer Loan # CL-9392),WV, WI, WY (WY-DBA AAG Reverse Mortgage Lender/Broker
License No. 2331). AAG is an equal housing lender. These materials are not from HUD or FHA and were not approved by HUD or a government agency. A reverse mortgage increases the
principal mortgage loan amount and decreases home equity (it is a negative amortization loan).

Reverse mortgage loan terms include occupying the home as your primary residence, maintaining the home, paying property taxes and homeowners insurance. Although these
costs may be substantial, AAG does not establish an escrow account for these payments. However, a set-aside account can be set up for taxes and insurance, and in some cases may
be required. Not all interest on a reverse mortgage is tax-deductible and to the extent that it is, such deduction is not available until the loan is partially or fully repaid. AAG charges
an origination fee, mortgage insurance premium (where required by HUD), closing costs and servicing fees, rolled into the balance of the loan. AAG charges interest on the balance,
which grows over time. When the last borrower or eligible non-borrowing spouse dies, sells the home, permanently moves out, or fails to comply with the loan terms, the loan
becomes due and payable (and the property may become subject to foreclosure). When this happens, some or all of the equity in the property no longer belongs to the borrowers,
who may need to sell the home or otherwise repay the loan balance. V2020.12.22