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Most reverse mortgages today are federally insured through the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (“HECM”) program, which is a non-recourse mortgage loan for homeowners aged 62 and older.” It converts about 50-75% of a client’s equity into cash based on the age of the youngest borrower. No sale or ownership transfer of the home is required. The borrower never gives up ownership or control of the home, as long as all loan terms are complied with. In general, the older you are, the more equity you may have in your home. The less you owe on your home, the more money you may be eligible to receive.
The loan proceeds are usually tax free** and no monthly payments are required except for taxes, insurance, and maintenance, regardless of the underlying value of the home. If the mortgage balance including accrued interest ever exceeds the value of the home, FHA mortgage insurance protects the senior homeowner and the heirs. It is a mortgage that is designed to be owed by the house, not the borrower. The borrower signs a release of personal liability at closing.
The above is not legal advice. You should consult an attorney for your specific situation.
From Estate Planning to Medicaid Planning
From Liability Protection to Income Longevity
Attorney Practice Areas that Can Use Reverse Mortgages:
- Elder Care
- Medicaid Planning
- Estate Planning
- Tax Planning
- Real Estate and Closing
- Accredited Veterans
- Foreclosure Prevention
- Bankruptcy and Creditors
- Litigation
- Divorce
Potential Benefits to Your Clients
- Increased Cash Flow – Tenure payments never run out! Credit lines cannot be closed
- Increased Portfolio Longevity
- Decreased Income Taxes
- Increase in Net Worth and Legacy for Heirs
- Ability to fund needed legal work
“Even the attorney who feels negatively toward reverse mortgages needs to know and understand them and how they could be used in legal planning. Blanket advising against reverse mortgages on general principles without reasons specific to a particular client’s situation is somewhere between incomplete legal analysis and legal malpractice.”
Jim Zeigler, Elder Law Attorney
Applications of the Reverse Mortgage Product
Planning for Long-Term Care (LTC) and Medicaid Issues
- Pay for LTC insurance premiums
- Minimize assets that can be recovered from Medicaid obligations
- Use loan proceeds to pay for LTC in the absence of other planning
- Pay attorney fees for LTC planning to prevent future problems
- Credit Lines are not countable assets that affect eligibility for Medicaid, SSI or VA Benefits
- Private Pay LTC during the five year look back period
- Converting countable assets to exempt equity
The above is not legal or financial advice. You should consult an attorney and/or financial planner for your specific situation.
Estate Planning
- Home equity must be part of the planning process: Currently there is $6 trillion in home equity in seniors’ homes over the age of 62**1
- Can be used to fund attorney fees to do the trusts, wills and advanced directives that are so critical in avoiding problems at death. Trusts not eligible in TX.
- Lower lifetime taxable estate by reducing equity value
- Paying for life insurance policies needed for planning or that are running out
- Funding probate or estate taxes
- Lowering home equity below the taxable limit
1**NRMLA (See Home Equity Climb to $6 trillion, Despite $4.9B Increase in Mortgage Debt NRMLA, 2016)
The above is not legal or financial advice. You should consult an attorney and/or financial planner for your specific situation.
Alternative for the Life Estate
LIFE ESTATE REVERSE MORTGAGE
- Unused portion of equity and value of life estate at risk
- More difficult for equity to be used to fund living or health expenses
- When the house is sold money may or may not be available to senior depending on children’s wishes especially with children involved in divorce or litigation
- Depending on tax structure, sale of home could be taxed with capital gains
- Family not protected with downturns in the housing market. Sometimes need to sell at inappropriate times.
The above is not legal or financial advice. You should consult an attorney and/or financial planner for your specific situation.
REVERSE MORTGAGE
- Equity not at risk after it is removed
- Equity always available in liquid form for planned or emergency needs
- When house is sold and reverse mortgage is paid off, 100% of the unused equity goes to heirs
- Step up in basis could be of value if children inherit house after senior dies. No deed transfer on reverse mortgage
- Guaranteed Credit Line gives a predetermined value of equity 30+ years into the future.
Potential Benefits of an HECM
For Veterans, Tax Planning, Divorce & Home Equity
Accredited Veterans Options
- Fund pre-application eligibility planning
- Fund private pay during the waiting period for VA benefits approval
- Give veterans needed cash flow during waiting phase
- Avoiding one year ineligibility because of selling the home
Tax Planning*
- Replace taxable income with reverse mortgage loan proceeds which are usually non-taxable.
- Letting interest build up so deductions can be bunched together, unlike forward mortgages which require you to make payments even if there is not enough to deduct.**
- Paying interest the same year as IRA withdrawals are taken out to offset retirement funding income.**
- Estate tax planning after death: Pass on a potential tax deduction to heirs to offset the inherited taxable IRAs.***
Divorce or Partnership Settlements
Because HECM reverse mortgage loan between 50-75% to the borrower, they may be used to buy out an ex-spouse in a divorce settlement or a partner who wants out of a real estate or business partnership. Many people may not qualify for a mortgage in retirement and if they do, they may prefer not to have a mortgage payment. HECMs are a way in which cash can be borrowed with minimal income and credit requirements without incurring a mortgage payment, although they are still required to pay property taxes, insurance and maintenance.
Shield Home Equity
Use a HECM to pay off current mortgages, not mandatory obligations.
A reverse mortgage can be used to protect and shield equity because two mortgage liens are placed on the home after closing. This is the case even if money is not drawn and only a growing line of credit is put in place.
Use as additional asset when client should not draw from IRAs and other retirement funds because of tax purposes. In bankruptcy and foreclosure situations, sometimes a reverse mortgage will protect equity and allow borrowers to convert equity to cash. Some bankruptcy attorneys use a reverse mortgage as part of pre-bankruptcy planning to reduce equity so that the house does not need to be sold. Situations can vary so it is best to consult with a bankruptcy attorney.
EXAMPLE: Joe and Deb Jones have a home free and clear with a value of $400,000. They are 70 years old and are currently divorcing. Joe wishes to stay in the home and Deb would like to purchase a home in another state. Neither spouse wants a mortgage payment nor do they want to downsize, and Joe does not want to sell the home that they live in now. Joe decides to do a reverse mortgage and obtains a lump sum of $200,000 to pay off Deb. Deb goes to the next state, and buys a home for $400,000 with her $200,000 settlement and does a HECM for Purchase. Neither Joe nor Deb has a mortgage payment and they each have the home they want.
NOTE: The persons depicted in this scenario are fictitious and for demonstration purposes only. Both homeowners are still required to pay property taxes, insurance and maintenance on their homes.
“Reverse mortgage loans accrue interest, generally over long periods of time, but the deduction can be lost if the home is sold by a person (or entity) who does not have sufficient income to be offset by the deduction”
Barry H. Sacks, Ph.D., J.D.
Helpful Articles
See how reverse mortgages have acquired an undeserved bad rap, according to Wade Pfau.
Check out this article that examines three strategies for using home equity, in the form of a reverse mortgage credit line, to increase the safe maximum initial rate of retirement income withdrawals. These strategies are: (1) the conventional, passive strategy of using the reverse mortgage as a last resort after exhausting the securities portfolio; and two active strategies: (2) a coordinated strategy under which the credit line is drawn upon according to an algorithm designed to maximize portfolio recovery after negative investment returns, and (3) drawing upon the reverse mortgage credit line first, until exhausted.
Many retirees and advisers resisted reverse mortgages in the past because of high costs). However, research such as Boston College’s National Retirement Risk Index 2010, has noted that many future retirees will not be in a position to avoid using home equity in retirement. Other research has shown that seniors will increasingly turn to reverse mortgages, because more affordable reverse mortgage options are now available than in the past.
This article examines the conditions, requirements and limitations on deductions of the interest accrued on reverse mortgage loans. As the 75 million members of the Baby Boomer generation march into retirement over the coming 15 years, the number of reverse mortgage loans will likely increase significantly.
Check out this research published in the Journal of Financial Planning has estimated that retirees can expect to safely withdraw roughly 4 percent of their initial portfolio value, adjusted for inflation, each year in retirement. However, recent research has questioned whether the 4 percent rule is safe for retirees who are projected to face lower returns than those experienced by previous generations.
* This advertisement does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
**Journal of Taxation 2016
***Recovering a Lost Deduction, Barry H. Sacks – 2015
