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Reverse mortgages can provide estate planning challenges

by Legacy Plan
updated November 7, 2023

Reverse mortgages can provide clear benefits to some retirees, but they also come with their own set of potential drawbacks in regard to estate planning.

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.

What is a reverse mortgage?

A reverse mortgage is a loan that allows homeowners 62 and older to convert a portion of their home equity into cash. The money from a reverse mortgage can be used for anything, including supplementing income during retirement or paying for long-term care. While a reverse mortgage can be a helpful tool for some people, it's not right for everyone.

With a reverse mortgage, loan payments are not required as long as the borrower continues to live in the home as their primary residence and pays their property taxes and homeowners insurance. If you move out of your home before the loan is repaid, you will either have to sell the home to repay the debt or default on the loan. Defaulting on a reverse mortgage loan can result in foreclosure, so it's important to be sure you can stay in your home for the duration of the loan before signing up.

The loan does not have to be repaid until the last surviving borrower no longer occupies the home as their primary residence, dies or the home is sold. At that time, the estate or the heirs can choose to repay the loan in full or sell the home to repay the loan.

The money you receive from a reverse mortgage is not considered taxable income, but it may affect your ability to claim certain tax deductions. It’s important to seek professional advice before taking out a reverse mortgage to be sure you understand how it could affect your taxes.

How will a reverse mortgage affect my estate?

If you have a reverse mortgage, your heirs will still be responsible for repaying the loan after you die. That means they may have to sell your home to repay the debt, which could be a problem if they can't afford the loan or don't want to keep the house.

Reverse mortgages can present several challenges in the context of estate planning, and understanding these issues is crucial for anyone considering a reverse mortgage or dealing with an estate that includes a home with a reverse mortgage. Here are some key challenges:

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  • Debt accumulation. A reverse mortgage allows homeowners to borrow against the equity in their homes, receiving funds as a lump sum, regular payments or a line of credit. The loan balance increases over time as interest and fees accumulate, which can significantly reduce the equity left in the home. This means less inheritance for heirs.

  • Repayment obligations. Upon the death of the borrower, the reverse mortgage becomes due. Typically, the home must be sold or refinanced by the heirs to repay the loan. If heirs wish to keep the home, they need to pay off the reverse mortgage, often through other financing options, which can be a significant financial burden.

  • Impact on heirs. Heirs might not be prepared for the quick decision-making required after the borrower’s death. They usually have a limited time (often around six to 12 months) to decide what to do with the property and repay the loan, which can be stressful and complicated, especially during a time of grief.

  • Decrease in estate value. Since a reverse mortgage reduces the equity in a home over time, the value of the estate left for heirs is decreased. This can be a concern for those wanting to leave a significant inheritance.

  • Property maintenance and requirements. The borrower must continue to meet the reverse mortgage's requirements, such as maintaining the property and paying property taxes and homeowners insurance. Failure to meet these requirements can result in foreclosure, affecting the estate.

  • Complexity in planning. Estate planning with a reverse mortgage can be more complex. Trusts and other estate planning tools must be carefully structured to accommodate the presence of a reverse mortgage. This can require more sophisticated legal and financial advice.

  • Potential for scams and misunderstandings. Elderly homeowners can be targets for scams related to reverse mortgages. Additionally, misunderstandings about how reverse mortgages work and their impact on an estate can lead to poor planning decisions.

  • Impact on Medicaid eligibility. For those who depend on Medicaid for long-term care, the money received from a reverse mortgage might impact their eligibility. This needs careful planning and understanding of both the reverse mortgage and Medicaid rules.

  • Tax implications. While the proceeds from a reverse mortgage are typically tax-free, the way these funds are used (for example, to invest in income-generating assets) can have tax implications for the borrower or the estate.

To address these challenges, it's essential to involve professionals who understand the intricacies of reverse mortgages and estate planning and can provide guidance tailored to the individual’s and family's needs and goals. Proper planning can help mitigate some of these issues and ensure that the borrower's wishes regarding their estate are honored.

How does a reverse mortgage impact Medicaid eligibility?

A reverse mortgage can have a significant impact on an individual's eligibility for Medicaid, especially when it comes to meeting the asset and income limits required for qualification. Medicaid is a government program that provides health care coverage to low-income individuals, including seniors who may require nursing home care or other long-term care services.

Understanding the relationship between reverse mortgages and Medicaid eligibility is crucial for seniors who are considering this financial option. When applying for Medicaid, one of the primary considerations is the asset test.

This test determines an individual's eligibility based on their available resources and property ownership. A reverse mortgage allows homeowners to convert a portion of their home equity into loan advances, which can be received as lump-sum payments, monthly installments or a line of credit.

The question then arises: How does a reverse mortgage impact Medicaid eligibility? The answer lies in understanding how Medicaid views home equity and assets in general.

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Typically, when determining eligibility, Medicaid considers certain assets as exempt and non-exempt. In most states, the primary residence falls under the exempt category up to a certain value limit (varies by state).

However, once an individual takes out a reverse mortgage, they are essentially borrowing against their home equity. This means that while they may still own the property technically speaking, the loan balance starts to increase over time.

The loan advances received from a reverse mortgage are not considered income by Medicaid since they are essentially loans that need to be repaid eventually. However, these advances do affect asset calculations because they increase the individual's liquid resources (i.e., cash).

As such, this added liquidity could potentially push someone above the asset threshold required for Medicaid qualification. Furthermore, if not managed carefully or used for qualified purposes such as medical expenses or home modifications related to health needs – which may be allowed in some circumstances – these funds could inadvertently disqualify individuals from receiving vital benefits.

Navigating through the intricacies of reverse mortgages and their implications on Medicaid eligibility requires careful consideration and professional advice. It is important to consult with experts in elder law or financial planning for seniors who specialize in these fields.

These professionals can provide guidance on how to structure a reverse mortgage in a way that minimizes its impact on Medicaid eligibility while still benefiting from the financial security it can offer. While a reverse mortgage can provide seniors with access to their home equity, it's crucial to understand the potential implications on Medicaid eligibility.

The increased liquidity resulting from loan advances may affect an individual's asset standing, potentially disqualifying them from receiving vital health care coverage. Seeking professional advice and developing a comprehensive financial plan that takes into account both reverse mortgages and Medicaid qualification rules is essential for those navigating long-term care planning and estate management.

What are the asset and income limits to qualify for Medicaid?

To qualify for Medicaid, individuals must meet certain asset and income limits. These limits vary by state and are subject to change, but understanding the general guidelines can provide valuable insight into how a reverse mortgage may impact Medicaid eligibility. When it comes to assets, Medicaid has specific rules regarding what is considered exempt and non-exempt.

Exempt assets are those that are not counted toward the asset limit for Medicaid eligibility. Common examples of exempt assets include an individual's primary residence (up to a certain equity limit) and personal belongings such as furniture and clothing.

On the other hand, non-exempt assets may include investment accounts, second homes, vehicles other than the primary mode of transportation, and cash savings beyond a specified threshold. In terms of income, Medicaid typically sets income guidelines that vary based on factors such as household size and medical expenses.

It's important to note that income from a reverse mortgage loan advance is generally not counted as part of an individual's regular income for Medicaid purposes. However, it is essential to carefully manage these funds to ensure they are used appropriately within the guidelines set by Medicaid.

For individuals considering a reverse mortgage while also aiming to maintain eligibility for Medicaid benefits in the future, proper financial planning becomes crucial. One option is strategic spending through a legal process known as "Medicaid spend down." This involves using excess funds from the reverse mortgage or other available resources to pay for medical expenses or necessary purchases that reduce countable assets.

Understanding the intricate relationship between a reverse mortgage’s impact on home equity conversion mortgages (HECM) and Medicaid eligibility necessitates careful consideration in elder law and long-term care planning. Consulting with professionals who specialize in this field can provide invaluable guidance when navigating these complex financial decisions.

While there are asset and income limits involved in qualifying for Medicaid benefits, exploring options like reverse mortgages should not be dismissed outright due to concerns about losing eligibility. By working closely with experts familiar with elder law and Medicaid qualification rules, individuals can strategically plan their finances to protect assets, ensure appropriate use of reverse mortgage proceeds, and potentially continue benefiting from Medicaid coverage for long-term care needs.

How does a reverse mortgage impact Medicaid estate recovery?

When considering the impact of a reverse mortgage on Medicaid estate recovery, it is important to understand how the two intertwine. Medicaid estate recovery refers to the process by which the state seeks reimbursement for long-term care expenses covered by Medicaid from the individual's estate upon their passing.

A key issue to consider is how a reverse mortgage affects this process. To begin with, it is important to note that a reverse mortgage is technically considered a loan and not income. Therefore, it does not directly impact Medicaid eligibility in terms of income guidelines. However, the funds received from a reverse mortgage can potentially affect Medicaid qualification in terms of assets.

According to Medicaid qualification rules, individuals must meet certain asset and income limits (generally about $2,000) to be eligible for coverage. Therefore, if the proceeds from a reverse mortgage increase an individual's assets beyond these limits, it can potentially disqualify them from receiving Medicaid benefits.

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Another crucial aspect to consider is how reverse mortgages impact home equity and Medicaid eligibility. In general, home equity is considered an exempt asset for Medicaid purposes as long as certain conditions are met.

However, when a homeowner takes out a reverse mortgage, they are essentially borrowing against their home equity and turning it into loan advances or payouts that they receive over time or as a lump sum. These loan advances are not considered exempt assets for Medicaid purposes and can be counted toward an individual's total assets when determining eligibility.

Also, while these loan advances do not affect income eligibility directly, they can indirectly impact an individual's ability to qualify for Medicaid through what is known as "spend down." This refers to the process of spending excess assets on medical expenses before becoming eligible for coverage. If an individual receives substantial loan advances from their reverse mortgage but fails to spend them down on allowable medical expenses within the specified timeframe before applying for Medicaid benefits, they may find themselves ineligible due to excess assets.

While a reverse mortgage does not directly impact an individual's eligibility based on income guidelines, it can potentially affect their Medicaid eligibility due to its impact on assets. The loan advances received from a reverse mortgage can increase an individual's asset level beyond the permissible limits for Medicaid qualification.

In addition, these loan advances may not be considered exempt assets and may need to be spent down on allowable medical expenses before becoming eligible for Medicaid benefits. Therefore, it is crucial for individuals considering a reverse mortgage to consult with an elder law or estate planning professional who can provide guidance on how this financial tool may affect their long-term care planning and Medicaid eligibility.


It is evident that reverse mortgages can have a significant impact on Medicaid eligibility. The complex interplay between home equity, income and assets can create challenges for seniors seeking to qualify for Medicaid while also utilizing the benefits of a reverse mortgage.

Understanding the Medicaid qualification rules and consulting with professionals in elder law and financial planning for seniors is crucial in navigating this intricate landscape. One must consider the potential consequences of a reverse mortgage on both current and future Medicaid eligibility when engaging in estate planning with reverse mortgages.

While a reverse mortgage payout can provide substantial financial flexibility to aging homeowners, it may also affect their ability to meet the asset test required for Medicaid qualification. When it comes to long-term care planning and nursing home care under Medicaid, understanding the intricacies of exempt and non-exempt assets becomes paramount.

It is essential for individuals contemplating a reverse mortgage to consider not only their immediate financial needs but also their long-term care requirements. While a reverse mortgage can provide liquidity through loan advances, the income derived from these advancements could impact eligibility based on Medicaid's income guidelines.

By proactively engaging in comprehensive planning that takes into account estate protection measures like Medicaid asset protection trusts or other strategies tailored to individual circumstances, retirement-age homeowners can strike a balance between accessing their home equity through a reverse mortgage while preserving their eligibility for crucial long-term care support.

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

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