One of the most common questions I get from clients who are considering a reverse mortgage is whether it will impact their estate plan. A reverse mortgage can be an effective financial tool for retirees looking to supplement their income, but it is important to understand how it affects the legacy you leave behind.

How Does a Reverse Mortgage Work?

A reverse mortgage allows homeowners aged 62 and older to convert part of their home equity into loan proceeds. Unlike a traditional mortgage, there are no monthly payments required—the loan balance grows over time, and repayment is typically deferred until the borrower passes away, sells the home, or moves out permanently.

While this may sound like an attractive option for cash-strapped retirees, there are some key estate planning considerations to keep in mind.

Impact on Your Heirs and Living Trust

When a homeowner with a reverse mortgage passes away, the loan becomes due. Your heirs may need to sell the home to pay off the balance, unless they have other assets to cover the debt. If the home's value is less than the loan amount, most reverse mortgages are non-recourse loans, meaning neither your heirs nor your estate will be responsible for the shortfall. However, if leaving the home to your heirs is important, a reverse mortgage could complicate matters.

Additionally, if you have a living trust, obtaining a reverse mortgage will require your trust to meet specific lender requirements. Since reverse mortgages reduce home equity, the value of the assets in your trust may decrease over time, leaving less for your beneficiaries.

Tax and Medicaid Considerations

Reverse mortgage proceeds are generally not considered taxable income. However, if you are receiving need-based benefits like Medi-Cal, the reverse mortgage could impact your eligibility. Planning ahead with an estate planning attorney can help ensure that your reverse mortgage doesn't inadvertently affect your access to these benefits.

Conclusion

A reverse mortgage can offer financial relief, but it may also have unintended consequences for your estate plan and your heirs. Before moving forward, consider how it aligns with your long-term goals and discuss your options with an experienced estate planning attorney.

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