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Mortgage

The More You Know: Reverse Mortgages & Estate Planning

You have likely seen several advertisements for reverse mortgages if you have spent any time watching television or surfing on the internet. The concept and sell is a simple one: as long as you own and live in your home, you can supplement your retirement income with a loan that you do not need to pay off. The trade-off when it comes to a reverse mortgage is that you are using your home’s equity to receive that extra retirement income. Even if a reverse mortgage is right for your circumstances, entering into a reverse mortgage is something that should be understood fully before signing any paperwork.

Reverse Mortgages Explained

How they work: Most reverse mortgages are federally insured and have several requirements including: (1) at least one borrower is aged 62 or older; (2) the home must be the primary residence; (3) the borrower must have financial resources to keep up with the home (taxes, insurance, maintenance); and (4) the borrower must own the home outright or have a low enough “regular” mortgage.

Impact on your estate plan: If you plan on leaving your home to your heirs, understand that a reverse mortgage will reduce the value they receive. Depending on when you pass away and how long the reverse mortgage was in place, your home’s equity may have been exhausted meaning that there is nothing of value to leave your heirs. In that case, your heirs may need to pay off or refinance the mortgage to keep the house.

Retirement income: The positive trade-off of a reverse mortgage is that you will have an additional source of retirement income, which can be received in several different ways including: (1) an upfront lump-sum, (2) a monthly payout, or (3) a line of credit. Each scenario has its own tax, borrowing costs, and home value implications. If you’re considering a reverse mortgage, talk to your financial advisor and estate planning attorney first, to make sure you select the best payout option for your circumstances.

Buyer beware: It is important to make sure you avoid scams that are pretending to be legitimate reverse mortgages. One way to help avoid being tricked is to make sure you work with a reputable provider. You should also make sure that a reverse mortgage is a good fit for your financial needs before signing any documents. Finally, consider the estate planning impact entering into a reverse mortgage may have on your intended wishes once you are gone.

The Implications of Reverse Mortgages

There are several factors to take into consideration when you are contemplating a reverse mortgage. Specifically, the effect it will have on your estate plan, the type of retirement income you are trying to obtain, scams to watch out for, and anything unique to your circumstances. There are several questions you should address before deciding whether or not a reverse mortgage is right for you. These include:

  • Can the life insurance you have in place pay off your reverse mortgage?
  • Will your reverse mortgage exceed your home’s value when you pass away?
  • What will happen to others living in the home if you die without paying off the loan?

Seek Advice

In addition to shopping around to find a reverse mortgage lender with terms that are most favorable to you, you should also determine whether a reverse mortgage is right for you and your needs. We can help you learn more about the options available to you and your family when it comes to your applying for a reverse mortgage and the impact it will have on your estate plan.

Call or contact us today, we are here to help.

Debt After Death: Why You Should Think About It When Estate Planning

If you carry debt, do not assume that your death or incapacity will make it automatically disappear. To the contrary, the money you owe may eat away at the assets you were planning to leave to your heirs or — if you owe a large amount of money — may wipe out your estate completely. Debt comes in many different forms including credit cards, student loans, car payments, mortgages, and other financial obligations.

Not Just About Assets

Estate planning lets you name people you trust to manage your affairs if you’re unable to do so and lets you indicate who will receive your property upon your death. While estate planning typically focuses on ensuring your assets will be distributed to your intended beneficiaries upon your death, the collective purpose behind financial and estate planning is to ensure that you’re building the largest nest egg possible and then protecting your family and loved ones in the event of your death or incapacity. For this reason, knowing what your debts are and implementing the proper estate planning will allow you to ensure those you leave behind are not left drowning financially. You will also be able to rest easy knowing what you’ve built will go to those you want, rather than to the creditors.

There are two types of debts: secured and unsecured. Secured debt is a loan that has been guaranteed by some form of collateral. If a borrower defaults on a secured loan, the lender can recover the collateral. House and car loans are the most common forms of secured debt. Unsecured debt, on the other hand, does not involve collateral. If the borrower defaults on an unsecured loan, the lender typically needs a court order to recover a judgment against the borrower or the borrower’s estate. The most common type of unsecured debt is a credit card account, although other common unsecured debts include most tax debt, personal or signature loans, student loans, or payday loans.

While some debt, like many federal student loans, goes away upon your death, others do not — like mortgages and home equity loans — leaving your family potentially on the hook. Secured debts essentially become the responsibility of the deceased’s estate because if the payments stop then the bank can retake the collateral. If you have a will-based estate plan, the process of paying off debts and distributing whatever assets are left over (if any) is a court process known as probate. If you are using a trust, then your successor trustee will follow a similar process, but it won’t necessarily involve a court.

Benefits of Estate Planning

Creditors are typically barred from going after retirement accounts or life insurance benefits because these often go to the named beneficiary, escaping the probate process. But, if the named beneficiaries are no longer living, the death benefit may go to your estate making it subject to creditors. Naming proper beneficiaries is key when protecting these larger assets from creditors after your death.

A comprehensive estate plan that includes an up-to-date will or trust and beneficiary designations can protect your family against the impact your debt may have on your estate. A little bit of planning can go a long way in ensuring your family and loved ones are protected in the event of a tragedy.

Of course, joint account holders and co-signers are held fully responsible for the entire debt even if all the charges were only made by one borrower. If you have loans that family members have co-signed for, let us know so we can develop a strategy to ensure your death doesn’t create a financial burden for them. Even for other debts, some creditors may try to collect from your family. For this reason, it’s always best to make sure your family knows you have a plan and knows to turn to us for help if you become incapacitated or upon your death.

Contact a Professional

While the tools typically used in estate planning may appear to be interchangeable, the planning process and the resulting documents, like a will, trust, and power of attorney, are as unique as the person. Working with us, as your knowledgeable estate planning attorney, can make it easier to address your needs and reduce the impact of your debt on your loved ones. Call or contact us today, we are here to help.