Centara Connection

A New Planning Tool in the Toolbox: EquityKey™

Kyle Malmstrom, Associate Advisor

Rarely in the Financial and Estate Planning worlds do new products come to market that are as creative and ingenious as EquityKey™. The practical applications for EquityKey™ include increasing one’s standard of living, innovative IRA distribution planning strategies, and tax conscious wealth transfer techniques. EquityKey™ can be used to purchase additional real estate in order to increase your family’s net worth, while enriching the lives of your loved ones.

Everyone has a different perception of wealth. Lee Brower, developer of the Brower Quadrants, discusses the different assets we each have in our lives. He states that our family and close friends are at the core. These are the people who stand by us; the people with whom we share our greatest triumphs and tragedies. We want to spend our time with these people. We want to be a part of each others lives and create memories that we can cherish forever. It is when these relationships are in jeopardy that we take time to recognize the depth of the relationships and shift our priorities from the future to the present.

Keeping your family close together and spending time with your children, grandchildren, and even great grandchildren may represent true wealth and happiness to you and your family. You may have already decided to enrich your family’s life by providing support for them today as opposed to waiting to provide a lump sum of cash upon your death. Or you may wish you could, but lack the resources to do so. A perfect example of this support is helping your children or grandchildren purchase a home so that they can raise their family here in San Diego.

The most common stumbling block to helping family members purchase a home is lack of liquidity. Options are usually limited to taking out a mortgage on the family home or gifting/loaning a lump sum of cash. Taking out that mortgage after you finally got the house paid off is rarely a high flyer when it comes to options. Most retirees have sufficient funds for their retirement but not enough to make a large cash gift to the kids for a down payment without affecting their own lives. EquityKey™ is just one solution that can provide the liquidity needed.

Here is the simplified version of the deal: EquityKey™ wants to buy a portion of the future appreciation in your property. EquityKey™ will give you a lump sum of debt-free cash today equal to 12-15% of the fair market value of your property in exchange for 50% of the future appreciation in your property, not the current equity. These economics apply to each homeowner. For married couples, if each spouse were to qualify, together they could be eligible for a 24-30% lump sum and in return, they would be selling EquityKey™ 100% of the upside future appreciation of that property. Please note that this is an abridged version of the product. There are many more details and specifics which your Centara Relationship Manager can discuss with you.

Let’s run through a hypothetical scenario to see how it works out. You and your spouse own a $700,000 home. You opt to participate in the program and share 50% of the future appreciation with EquityKey™. In return you receive a debt-free lump sum of between $84,000 and $105,000. Now, using proper gifting strategies, you gift this money to your beneficiary who in turn purchases a $500,000 home. A couple of things just happened. First, you enriched the life of a loved one with home ownership. Second, you helped establish a cost basis from which property taxes and Prop. 13 will be based on over the life of this asset. In other words, property taxes will only be higher as real estate appreciates. Purchasing today begins what will likely be a low property tax rate years from now. Finally, you actually increased the growth potential for the family by adding an appreciating $500,000 asset to the family’s balance sheet. Now you have a $700,000 asset growing at half of the historical rate of 6% because EquityKey™ is getting the other 3%. But you added another asset on the family balance sheet that is growing at 6%. If over the next 12 years both assets double (Rule of 72 at 6%), the gross family real estate portfolio will be worth $2,050,000. If there was a remaining $300,000 note on the new property, the net real estate portfolio would be $1,750,000. Compare this to not participating in EquityKey™. Without using the EquityKey™ option in this scenario, the net real estate portfolio retained by you to pass on to your family would be $1,400,000. By using EquityKey™, you have effectively increased the growth potential of the entire family estate, and perhaps most importantly you dramatically improved the family experience with home ownership. The key is shifting the focus from future inheritance to present gifting.

Several of our clients have found this to be quite compelling and an ideal solution for clients with liquidity issues. EquityKey™ is a powerful financial tool that can be utilized in a variety of scenarios of which this is just one. Other ideal candidates for the program are retirees who supplement social security income with IRA assets, families with estate tax issues, and real estate investors needing liquidity to fund additional deals. To help determine whether EquityKey™ is a tool that should be considered in your planning, please consult with your Centara Relationship Manager.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

Securities offered through Registered Representatives of Centara Capital Securities, Inc., Member NASD/SIPC. Investment advisory and financial planning services offered through Centara Capital Management Group, Inc., a Registered Investment Advisor. Insurance #0D85861. CA DRE License No. 01519824. Legal services provided by Centara Legal Group, APC, David Gebhardt, Principal.