Does reverse mortgage change estate planning? How?

This is a huge question, and should be put to a lawyer who is doing estate planning for your mother. Briefly, if she takes out a reverse mortgage, you need to decide whether the family will let the house go when she passes away, or pay the mortgage. The mortgage will have to be paid after she passes away; there are deadlines, and while there are extensions available, essentially the mortgage has to be paid within a relatively short period of time after your mother passes. There will be very little time to get the house ready for sale and get it sold. There are always tax issues; these should be discussed with your mother's tax advisor.

In a reverse mortgage, the lender will get the house. ?If the money borrowed is more than was paid for the house, it will be treated as a profit on the sale of the house, when the lender takes it over. ?It simplifies the estate plan because the heirs won't inherit the house, it will be gone. ? The max that can be borrowed on a reverse mortgage is, after the closing costs, around 45% of the appraised value for a 62 year old. ?As one ages, the amount goes down significantly. ?So, the owner is selling a $200,000 house for $90,000. ?The older the owner is the lower the borrowing limit, after closing costs, a 70 year old couple would only get 20% or so. ?Selling a $200,000 house for $40,000 isn't very attractive. ?? A reverse mortgage should only be considered if the couple is likely to stay in the house for many years. ?If the couple is considering a move out of state or to an elder community, they should sell the house, the buyer will pay full price for the house while a reverse mortgage will only give them a fraction of the value. ?A single person is never a good candidate for a reverse mortgage, it's too likely that they will lose the house in a short time. ?Obviously, reverse mortgages only make sense for younger retirees, a couple of 63 year olds might live in the house for 20 or more years.

Since there are several different ways reverse mortgages can be set up, you have to tell us what terms she is looking at. ?More importantly, it is her home and her decision as to what she wants to do and not the family's. ?She should be asking and not you.

It is my understanding that at the time of the owner's death, the property is automatically transferred to the lender. Therefore, it would no longer be part of the estate. Check with an accountant or tax expert about the tax implications.

It will not substantially alter an estate plan EXCEPT you must realize that the loan must be paid back upon her death so unless there are other assets it is likely the house must be sold to pay it back.

With a reverse mortgage the mortgage must be paid off promptly after death of the borrower. This usually requires the prompt sale of the property. All accrued interest on the reverse mortgage is paid at the time the reverse mortgage is paid off. This will reduce the net proceeds in your mother's estate. She must examine how the reduced estate affects her estate plan.

If she does the reverse mortgage, the only thing that will change is that when she dies or permanently leaves the house, the mortgage has to be repaid. There are no tax consequences.