A reverse mortgage can be a helpful financial tool for some older homeowners, but it also creates important estate planning issues that families often do not fully understand until after death or incapacity.
In California, a reverse mortgage allows homeowners who are generally age 62 or older to borrow against the equity in their home without making monthly mortgage payments. The most common type is a Home Equity Conversion Mortgage (HECM), which is federally insured. Instead of the homeowner paying the lender each month, the loan balance grows over time and is usually repaid when the homeowner dies, sells the home or permanently moves out.
Many seniors use reverse mortgages to supplement retirement income, pay medical expenses, remain in their homes longer or avoid selling appreciated property. However, the loan can significantly affect what happens to the home after death.
One common misconception is that children or beneficiaries automatically inherit the home “free and clear.” They do not. The reverse mortgage must still be paid off. After the borrower dies, the estate or beneficiaries generally have several options:
- Pay off the loan and keep the property
- Refinance the balance into a new loan
- Sell the property and keep any remaining equity
- Allow the lender to foreclose if the debt exceeds the value or the heirs do not want the property
Most reverse mortgages are “non-recourse” loans. This means beneficiaries usually will not personally owe more than the home’s value, even if the loan balance is higher than the property value at death.
Reverse mortgages can also complicate trust administration. Many California homeowners place their homes into revocable living trusts to avoid probate. In many cases, a reverse mortgage lender will allow the property to remain in the trust if certain requirements are met. However, the trustee must continue paying property taxes, homeowners’ insurance and maintain the property. Failure to do so can trigger default.
Incapacity planning is another major concern. If a homeowner moves into assisted living or a nursing facility for an extended period, typically more than 12 consecutive months, the reverse mortgage may become due because the home is no longer considered the borrower’s principal residence. Families are often surprised by this issue during a medical crisis.
Good estate planning can help avoid panic and confusion later. A properly drafted trust and durable power of attorney can give trusted individuals authority to communicate with the lender, manage the property and explore options if the borrower becomes incapacitated.
Before obtaining a reverse mortgage, families should carefully consider long-term goals for the home. If children hope to keep a family cabin or longtime residence, the growing loan balance may make that difficult in the future.
A reverse mortgage is not necessarily good or bad – it is simply a financial tool. Like any major financial decision, it should be evaluated as part of an overall estate plan that considers aging, incapacity, taxes, inheritance goals and the practical realities facing loved ones later on.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues. This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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