Estate and Financial Planning with Reverse Mortgages
Most FHA HECM reverse mortgages today are used by homeowners as a means to stay in their home or to improve their lifestyle, but as planners and advisors become more aware of the true cost of a reverse mortgage and as planning uses of reverse mortgages are developed, we believe the future of reverse mortgages may be in the area of estate and financial planning. New techniques are being developed and all planners should be familiar with this new tool.
NEW! A study soon to be released in the financial planning industry projects a higher end of life net worth for investors who use a Standby Reverse Mortgage HECM line of credit than for those who don’t. Dr. John Salter made a presentation about the study at the National Reverse Mortgage Lenders Association annual conference on Wednesday, October 26, 2011. Information on this new strategy can also be found in the AARP Magazine in their recent article (online Novemb er 2011) on options for getting money out of your home. Use our contact us form or give us a call if you’d like further information
Ms Colleen Moore, President of Golden Equity Mortgage of San Diego provided the following examples at the October 2008 annual meeting of the National Reverse Mortgage Lenders Association.
1. An elderly woman owned a 1.2 million dollar home but was running short of cash. To sell the home would have meant a $250,000 capital gain tax and finding a new place to live, but if she kept the home the heirs would likely inherit the home at a stepped up basis and thus avoid the $250,000 tax. The reverse mortgage suggested by the planner would be far less costly than paying the tax and would provide the cash for the elderly woman to remain in her home, a solution that pleased the entire family.
2. A woman with a large estate used a reverse mortgage lump sum to purchase a single premium life insurance policy that was placed in an irrevocable life insurance trust. Estate taxes saved were expected to far exceed the cost of the reverse mortgage.
Another planning possibility involves a couple in their 60′s drawing down on their 401K to pay $2000 per month on a $180,000 mortgage. A reverse mortgage would eliminate the mortgage payment and the drain on their 401K. After 10 years they would avoid having to draw $2000 x 12 x 10 = $240,000 in monthly payments from their 401K and the future balance in their 401K could potentially offset some or even all of the cost of the reverse mortgage. Should they get a reverse mortgage? That is something they should only decide with the advice of their financial advisors, but this example points out something about reverse mortgages that is sometimes overlooked – there is a substantial offsetting financial benefit to the homeowner in the future value of the payments not made (the cash retained) over the life of a reverse mortgage.
