Scenario:  Son wishes to support his retired parents financially.  He
originally considered simply gifting $10k/year.  But, to increase the
amount his parents receive annually, the son thought a better way
might be to mobilize the equity of his parent's house *during their
lifetime* rather than having them die with a $500k house.

Goals:
  1. Parents still live in the house, preferably "rent-free".
  2. Parents acquire lump-sum/monthly payments.
  3. Son gains access to real estate investment.
  4. Taxes are avoided/minimized to both parents and son (e.g., gift
tax, mortgage interest-rate deductions, etc.)
  5. Opportunity-costs are considered (compare overall transaction to
long-term stock market investment; e.g., breaking even in real estate
investment = opportunity lost in stock market).

Some general info/questions to guide answer:
  * Parents are under the $1 million lifetime gift tax limitation.
  * Should the son Buy/Mortgage the house outright at market value?
  * If the parent's pay market value rent with the proceeds from the
sale, can the son simply gift back $10k/annually (to minimize their
rent)?
  * Is there any realistic scenario where the son can pay monthly
payments (e.g., $3k) to the parents instead of to a mortgage (or is
there no basic difference)?

Any advice is appreciate!

Yes, talking to a professional will be well worth your time/money in this case.  

Something to consider: If a lump sum payment is optimal, you can help
your parents set up an annuity that will pay them guaranteed payments
until they pass away.  I'm guessing that this can easily be more than
the $3,000/month you're hoping for since the house is worth $500K and
your parents probably aren't on the younger side of life, but that
depends on their age, how much debt they have...