Reverse Mortgages and Estate Planning

Reverse mortgages are normally thought of only as a tool used as part of a person's retirement planning. However, the use of a reverse mortgage will also have a direct impact on a person's estate planning and on whether that person's heirs will receive any type of an inheritance from them after they pass away. For this reason, understanding how a reverse mortgage works is important as a person completes their estate plan.

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Understanding how a reverse mortgage works and the impact it could have on your family and on your estate is vitally important. If you are thinking of using a reverse mortgage as part of your retirement or estate planning, here are four things that you should specifically understand that may have an impact on your decision.

The first thing to understand is that the most common use of reverse mortgages is when there is a small estate that has few assets in it. This is true because the individual who is obtaining the reverse mortgage usually needs the money provided by the reverse mortgage to be able to sustain their lifestyle for several more years. When using a reverse mortgage, usually the largest and oftentimes the only asset that exists is the house. If this is the circumstance for yourself or for a loved one, and there are no other sources of income that can be used to continue to provide income then a reverse mortgage may be the only option available.

Under the terms of a reverse mortgage, the individual who owns the house signs a document that pledges the home as security for either a lump sum loan or for a monthly amount of money that will be deposited in the owner's account. As the money is provided, the mortgage associated with the house covers the ever-growing amount of money that is then owed to the lender. When the person passes away, the relatives have the option of either paying the reverse mortgage off with their own money so they can keep the house; or selling the house and paying the mortgage off with the proceeds and keeping any amount that remains; or simply allowing the bank to take ownership of the home in satisfaction of the amount that is owed which is commonly done when the amount that is owed to the lender is more than the home is worth.

When a person is considering using a reverse mortgage the real key is whether there is in fact any equity in the home. There are some circumstances where an individual who is seeking a reverse mortgage cannot obtain one because they already have a mortgage on the home that they have not yet paid off. The most common scenario is that the individual seeking the reverse mortgage has paid the home off and owns it free and clear of any other mortgages. When this occurs, what the homeowner is doing in obtaining a reverse mortgage is simply tapping into the equity of the home.

Most lenders will complete a thorough analysis to determine the amount of equity that does exist in the home. Usually, the lender will only loan a percentage of the value of the home simply to make sure that the mortgage they obtain will be fully secured by the home. As a result, if you have a loved one who has obtained a reverse mortgage and then has passed away, the first question you need to ask is whether there is any equity in the home above and beyond the reverse mortgage. In other words, you need to determine whether the value of the home is more than what is owed under the reverse mortgage.

With a reverse mortgage exist and then they an individual passes away this triggers certain actions under the terms of the reverse mortgage. Normally, the family members will have an opportunity to discuss with the lender who holds the reverse mortgage the options available to them. These options would include, using their own money to pay off the reverse mortgage so that they can keep the house; or selling the home and using the proceeds from the sale to pay off the reverse mortgage with the hope that there will be some money left over to distribute to themselves; or, as stated above, if the home is worth less than the reverse mortgage, turning the home over to the bank and allowing it to take possession in satisfaction of the reverse mortgage.

There have been numerous times when clients have come to us asking whether a reverse mortgage is a good idea. As estate planning attorneys, we can provide counsel and advice to our clients. However, we usually don't know our client's personal circumstances well enough to understand what they're basic financial needs are and whether those needs are being met. This is normally a conversation that a client would have with a financial advisor. However, when clients do ask this question we simply go over the information set forth above to let them know how a reverse mortgage can impact their Estate Planning and their ability to leave an inheritance for their family.

My opinion is that an individual must consider themselves first. In other words, I encourage my clients to not worry so much about leaving an inheritance for their family or loved ones, especially if doing so will be at their own expense. Rather, I encourage my clients to think about their own needs first, and what those needs maybe in the future. If they are able to meet those needs and leave an inheritance to their family or loved ones, then they are truly blessed.

Our experienced Estate Planning team of attorneys can help you and your family with your Idaho estate plan or with your probate needs. Whether you are seeking your own customized Estate Plan or need a Probate for a loved one who has passed, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation with the Racine Olson team. You can also email us directly at racine@racinelaw.net. We will answer your questions and will help you solve your Idaho Estate Planning and Probate problems.