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Reverse mortgages can provide estate planning challenges

by Legacy Plan
September 23, 2016

Reverse mortgages can provide clear benefits to some seniors, but also come with their own set of potential drawbacks. A reverse mortgage can help you cover some health care costs and may help you delay going into a nursing home. However, reverse mortgages could, depending on the eligibility rules observed in your state, negatively impact your Medicaid eligibility. They can also reduce the size of your estate that you leave for your loved ones, unless you plan for the payment of this debt after your death (using a vehicle such as life insurance). Whether a reverse mortgage is right for you and your estate plan depends on the particular facts of your situation.

If you watch much TV (beyond premium channels and public broadcasting), you've probably seen commercials marketing reverse mortgages to seniors. Reverse mortgages can offer real benefits to some seniors, depending on their circumstances. However, these reverse mortgages can also come with distinct risks, too. Before you make the decision to take out a reverse mortgage, you should educate yourself on all of the impacts that a reverse mortgage will have, including on your estate plan.

A reverse mortgage can be very helpful to some seniors. Generally, advisers might suggest a reverse mortgage as a viable option for seniors who have relatively little cash but a lot of equity in their home. The money received for a reverse mortgage can be invaluable to some people. The proceeds of a reverse mortgage may help pay for in-home care, which may allow you or a loved one to avoid, or at least put off, going into a nursing home.

There are downsides, though, as it relates to your estate plan. A reverse mortgage can impact your Medicaid eligibility. Depending on the state where you live, it is possible that your state's Medicaid agency could view the payments you receive from your reverse mortgage as income and this added “income” could put you above the threshold for continued Medicaid eligibility. Even if your state doesn't view the payments as income, your state could view a lump sum or the accumulation of monthly payments received as part of a reverse mortgage as assets that might take you over the allowable maximum for continued eligibility.

Additionally, there is the scenario in which you die before you pay back the total amount you took out in your reverse mortgage. When that happens, the loan is paid back from the proceeds of the sale of your house. But what if you don't want to sell your house or you don't want to leave your loved ones a diminished asset? One way to deal with this is by using life insurance. Buying life insurance for the purpose of having the proceeds cover your outstanding reverse mortgage balance potentially can accomplish two goals. One, this strategy can potentially lower your death tax obligations, as your it lowers the amount of equity you have in your home, so the total amount of your taxable estate (for purposes of death taxes) is reduced by that same amount. Also, this strategy ensures that your loves ones will receive a set amount of inheritance that won't be impacted by the fluctuations of the real estate market.

If you're considering a reverse mortgage, your estate planning professional can help you go over your circumstances and goals and decide if it makes sense for you.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

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Email - info@legacyassuranceplan.com
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