Question >> I found your column on “Money when you need it” thought provoking. My wife and I are in our late 80s and we have a family trust. I have a large IRA and we live off the income from the RMD. Upon my death, (if I am the last to die) the beneficiaries (my children) get this IRA money immediately.

Since we have no other cash savings, we will need a substantial fund to support expenses while the house is being sold and the estate settled. I was wondering what your thoughts might be about these alternatives for making money available for the executor to settle our estate:

Transfer the needed funds from the IRA to cash or a Roth IRA in excess of the RMD and pay the taxes on the distribution now (or possibly half of the amount this year and the other half at the beginning of next year). What about taking out a reverse mortgage? Our house is valued at about $3 million with a $600,000 mortgage at 3.5% and is interest only, non-amortized.

Should we make the family trust the beneficiary of all or a portion of the IRA (so that the funds are not immediately distributed to the beneficiaries)? Should we consider doing a refi or home equity line of credit if possible?

What are your thoughts about these alternatives, and do you have any additional ideas you might offer?

Answer >> I am a stickler for terminology, so I want to correct your reference about making funds available for your “executor.” If you have a trust, the person responsible for the administration of your estate after you die will be your successor trustee, not an executor. OK, now that we have that straightened out, let me respond to your question.

Taking distributions from your IRA to place into an account that would be immediately available to your trustee upon your death is a good option. To facilitate this, you should open a savings account in the name of your trust. This way, your named trustee can access the savings account once they have death certificates in hand — which should take about two weeks. Do not bother with a Roth, just a simple savings account titled in your trust should work fine.

Reverse mortgages can be beneficial in certain situations but not the best option here. Fees are involved in setting up reverse mortgages and usually require being in first place as a lien holder against your property. The reverse mortgage lender would likely require you to refinance your current $600,000 mortgage and, with a rate of 3.5% on your mortgage, refinancing is not a good choice since it would most definitely be at a higher rate.

Making your trust the beneficiary of your IRA can cause unintended and unfavorable tax implications. You could make the Trust the beneficiary of a percentage of your IRA which would provide some immediate liquidity and minimize the tax implications. This or setting up a separate savings account in the name of the trust are both your best options.

Again, refinancing your low interest rate mortgage and taking out equity is not a great option. You could consider setting up an equity line of credit but be sure to discuss your goal of making the line available to your successor trustee later. Some banks may not allow your successor trustee to draw on a line of credit after you are deceased. Consider, however, that you have the costs associated with both a refinance and an equity line of credit which can be avoided by simply taking additional funds from your IRA and setting them aside in a savings account titled in the name of your trust.

Great job considering the alternatives! I have no further recommendations for creating cash when you need it.

Liza Horvath has over 30 years of experience in the estate planning and trust fields and is a licensed professional fiduciary. Liza currently serves as president of Monterey Trust Management. This is not intended to be legal or tax advice. If you have a question, call (831) 646-5262 or email liza@montereytrust.com.