Q My wife and I always set money aside for the “golden years” and we were moderately successful. I am now what you would call elderly, and my wife passed years ago. Having in-home care is expensive and I am running out of liquid assets. I have a good deal of real estate, and we collected art over the years. Some of the art is by artists whose name anyone would recognize, and it is very valuable. Both the paintings and our real estate have continued to appreciate in value. The obvious solution would be to sell something, but my tax advisor informs me that if I start selling the art or liquidate real estate, I will pay huge capital gains taxes. Just wondering if you might have some ideas.

A It is easy to underestimate the cost of services for our “golden years.” If we need 24/7 assistance and decide we want to continue to live at home, in home care can run $40,000 per month if you use an agency. Some seniors will find “caregivers” they can pay directly and, by the hour, they can appear to be less expensive. However, in working with an agency, the agency will train and oversee the caregivers, have insurance in place in case an issue arises, do all the payroll and tax withholding, and they carry worker’s comp insurance. Also, with an agency, if your caregiver calls in sick, they send someone else. I always recommend using a reputable agency.

To solve your illiquidity problem and avoid capital gains taxes, consider using your real estate or art as security for a loan. The downside of real estate loans is that traditional bank lenders will seek at least two sources for repayment. Income being one source and property foreclosure being the second. For a traditional loan or line of credit, your income must be sufficient to support the loan payments. Some hard money lenders will provide a loan and secure it as a first deed of trust on your real estate. Some will require monthly payments and others will forego payments and add the interest to the principal of the loan. Hard money loans are extremely expensive both to put into place and the annual interest rates are always more than you would pay for a traditional bank loan.

Finally, you could investigate a reverse mortgage. With a reverse mortgage, the monthly payments are almost always “waived”, and the lender looks for repayment of both principal and accrued interest after your death. Reverse mortgages can also be expensive to put into place and your executor or trustee must be very diligent after your death to notify the lender immediately and get the house on the market as soon as possible. If your executor fails to properly notify the lender, there can be grave (and expensive) consequences.

Unlocking the appreciation in your art may be a good way to get the liquidity you need and avoid capital gains taxes that would be paid if sold. Some of the benefits of leveraging art is that you can continue to enjoy it and, after your death your real estate gets a step up in tax basis and can be sold to pay off the art lender. This way, your art also stays in the family. Collectible cars, jewelry and rare books can similarly be used as collateral for loans.

Some banks will lend money using art as collateral but one such lender, Sotheby’s Financial Services, has a high level of comfort with art secured lending and they base the loan solely on the value of your art. This means no underwriting or examination of your personal finances is required.

Check out all the options and see which is best for you. Selling appreciated assets and paying capital gains taxes should be your last resort.

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