Reverse Mortgage Uses in Legal Planning

From estate planning and tax planning to foreclosure prevention and litigation, reverse mortgages can be an effective tool used in legal planning. A borrower could benefit from a reverse mortgage through increased cash flow, increased portfolio longevity, decreased income taxes and increased net worth and legacy for heirs.*

With a reverse mortgage, the borrower still owns the home and remains on title. The deed doesn’t change hands until the loan is due and payable—usually when the borrower permanently moves out or passes away. Reverse mortgages can also be done when the property is in a revocable or irrevocable trust.

Here are some examples of how a reverse mortgage could be used in legal planning for your senior clients.

Silver Divorce Scenario 1 — Spousal Buyout

A common divorce situation is that one spouse wants to continue living in the home while the other wants to move out with their share of the home equity. The reverse mortgage could allow one ex-spouse to stay in the home, with the reverse mortgage used to pay a necessary portion of the home’s equity to the other ex-spouse.

The buyout can happen for the departing spouse without disrupting either retirement plan because of the reverse mortgage’s flexible repayment feature.

Scenario 2 — Sell and Both Buy

Alternatively, the home could be sold with the proceeds split, and then each ex-spouse could use their half of the home equity with a HECM for Purchase (H4P).

An H4P loan allows homebuyers 62 and older to purchase a new primary residence with a down payment of about half of the purchase price** from their funds, with the remainder funded by the H4P loan.

The homebuyer can, and typically does, apply proceeds from selling their current home toward the down payment requirement. By selling the home, each spouse can have half of the equity, which is often enough for both to acquire a similar home with no monthly mortgage payment using an H4P loan (must live in the home and pay the property charges, like taxes, insurance and maintenance). So, it feels like an all-cash payment, except the borrower gets to keep more of their retirement assets to use as they wish.

*This advertisement does not constitute tax and/or financial advice from Fairway. **The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.

Elder Care

• A reverse mortgage could help a client maintain their independence, live at home and cover home care and other services

• It can provide more options when helping clients navigate future housing options

• Elder law attorneys can provide a basic overview of the pros and cons of a reverse mortgage and encourage their interested senior clients to speak with a financial advisor

Planning for Long-Term Care (LTC) and Medicaid Issues*

• Pay for long-term care insurance premiums (before needing care)

• Fund the deposit on a nursing home (e.g., the care is needed for one spouse and the other spouse still lives at home)

• Use loan proceeds to pay for LTC in the absence of other planning

• Minimize assets that can be recovered from Medicaid obligations

• 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

Tax Planning*

• Replace taxable income with reverse mortgage loan proceeds, which are usually non-taxable*

• Letting interest build up before making a payment toward the loan balance so deductions can be bunched together.* This is unlike forward mortgages, which require you to make payments even if there isn’t 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*

Estate Planning

• Home equity must be part of the planning process

• Can be used to fund attorney fees to do the trusts, wills and advanced directives that are critical in avoiding problems at death (Trusts not eligible in TX)

• Lower lifetime taxable estate by reducing equity value*

• Pay for life insurance policies needed for planning or that are running out*

• Funding probate or estate taxes*

• Lowering home equity below the taxable limit*

Real Estate and Closing

• Advise your client through the legalities of reverse mortgages

• Act as the real estate and/or closing attorney in the transition

• Help non-borrowing spouses, heirs and borrowers understand what the reverse mortgage transaction means for them so there are no surprises later on

Alternative for the Life Estate

Life Estate

• 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 seniors depending on children’s wishes, especially with children involved in divorce or litigation

• Depending on the tax structure, the home sale could be taxed with capital gains

• Family not protected from downturns in the housing market. Sometimes need to sell at inappropriate times

Reverse Mortgage

• Equity is not at risk after it’s removed

• Equity is always available in liquid form for planned or emergency needs

• When the house is sold, 100% of the unused equity goes to the heirs

• Step up in basis could be of value if children inherit house after senior dies. No deed transfer on a reverse mortgage

• Guaranteed line of credit gives a predetermined value of equity 30+ years into the future

Foreclosure Protection

• If your client struggles to make payments on a traditional mortgage, a reverse mortgage may be a viable option to help them stave off foreclosure

• A reverse mortgage must be a sustainable solution, and it often is, as a reverse mortgage would allow your client to continue living in their home without a monthly mortgage payment (borrower must still pay property charges, like taxes, insurance and maintenance)

• Note: Reverse mortgage lenders must conduct a financial assessment on prospective borrowers to ensure they are willing and able to pay ongoing critical property charges, like taxes and insurance. While no minimum credit score is required, the lender will look at credit history, property charge history and monthly residual income when deciding whether to approve the prospective borrower’s loan

Bankruptcy and Creditors

• A reverse mortgage loan can be used to shield home equity because up to two liens (one from the lender and one from HUD) are placed on the home after closing*

• If a reverse mortgage is in place before declaring bankruptcy, available funds in a HECM line of credit may be protected from being liquidated

• Some bankruptcy attorneys use a reverse mortgage as part of pre-bankruptcy planning to reduce equity so that the house doesn’t need to be sold

Litigation

• Reverse mortgages can be used to pay medical and attorney costs until a lawsuit can be completed

• Lien and creditor protection with up to two mortgages for 150% of the original appraised value of the house sold by a person (or entity) who does not have sufficient income to be offset by the deduction.”