Using A Reverse Mortgage As An Estate Planning Tool
Reverse mortgages are often viewed by some as a good way to get income later on in life. There is a downside in that a person taking out a reverse mortgage eventually loses the equity in his home; however, there are some benefits to using a reverse mortgage as an estate planning tool. As with most things, the benefit of using a reverse mortgage as part of an estate plan depends on the specifics of a person’s estate and beneficiaries.
A reverse mortgage is a loan that a home owner receives in monthly payments in exchange for giving up the equity in his or her home. Generally, once the homeowner passes away the bank or reverse mortgage lender takes over the home and sells it to recoup the payments made to the homeowner. Only people who are 62 years old or older can qualify for a reverse mortgage under the law.
Homeowners who use reverse mortgages do not usually have to repay the loan amount unless they stop using the home as a primary residence, perhaps because they move to assisted living facilities, or they otherwise break the terms of the reverse mortgage agreement.
One reason people consider a reverse mortgage an estate planning tool is because it can reduce the amount a beneficiary would have to pay in taxes. Instead of gifting a beneficiary a home, a person who takes out a reverse mortgage can slowly gift the payments to a beneficiary. When the gifts are spread out, the beneficiary does not have to go through the hassle of selling the home, or have to pay high taxes on capital gains once the home is sold.
Another benefit can come in freeing up money in order to pay for life insurance, which can often be more expensive when purchased later in life. This method of using a reverse mortgage would essentially transfer the equity in the home into the payout of a life insurance policy. Each of these considerations has benefits and negatives. For example, a person over the age of 62 may have to pay very expensive premiums in order to secure life insurance that would pay out a value equivalent to his home equity.
Furthermore, if a person takes on a reverse mortgage in order to save the beneficiaries the hassle of selling the home, and then passes away soon after, it may create more problems. The reverse mortgage lender may sell the home at a price that leaves little to the beneficiaries after the loan is paid off, and the beneficiaries would not have received much from you while you were alive. The only way the beneficiaries would have to salvage the situation would be to pay off the reverse mortgage themselves in order to keep the home.
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While a reverse mortgage may seem like a good solution to get some cash on hand to gift to your beneficiaries now as well as take care of your needs, there may be pitfalls with taking on the loan. Before you decide to use a reverse mortgage as an estate planning tool, you need to consult with an experienced estate planning attorney to explore all your other estate planning options. Call the experienced estate planning attorneys, at the Millhorn Elder Law Planning Group located in The Villages, Florida today.