Reverse Mortgages and Living Trusts

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Reverse Mortgages and Living Trusts

You may use a reverse mortgage to access your home equity and avoid selling or moving out of your current residence. You have greater influence over what happens to your assets, including your house, after or even before you pass away with a living trust than with a will. Combining the two may sometimes make sense.

Key Takeaways

  • You are able to have a living trust and a reverse mortgage on your house.
  • You may have more influence over what happens to your house after your death if you create a living trust.
  • By avoiding the potentially time-consuming and expensive probate procedure, a living trust may be advantageous to your heirs.
  • The creation of living trusts is expensive, and not everyone need one.

How a Reverse Mortgage Works

A reverse mortgage is exactly what its name implies: The lender pays you, not the other way around. Those payments may be set up in a number of different ways, such as a single lump amount, regular monthly income, or a credit line that you can use as necessary. After you vacate the property, sell it, or pass away, you will be responsible for making the lender whole. Your home’s equity, among other things, determines how much money you could be qualified for through a reverse mortgage.

You (and any co-borrowers) must be at least 62 years old to be eligible for a home equity conversion mortgage (HECM), the most popular kind of reverse mortgage. Your spouse may be permitted to remain in the house if you pass away or enter a nursing facility if they are named in the loan documentation as an eligible non-borrowing spouse if they are under the age of 62. The age of your eligible non-borrowing spouse or co-borrower will be taken into account if they are younger than you. You may borrow more money if the youngest individual on the mortgage is older.

After your death and the death of any co-borrowers, the reverse mortgage payments cease. If all conditions are met, a non-borrowing spouse who is qualified may remain in the marital residence; however, they will not be entitled to any future payments.

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If your children or any person other than your spouse is the rightful owner of your house, they cannot retain it until they settle the mortgage. If not, they have two choices: sell the house and make a payment to the lender, or give the lender the deed.

Despite not necessarily being the other borrower’s spouse, a co-borrower on a reverse mortgage must be at least 62 years old when the mortgage is authorized.

How a Living Trust Works

To administer the assets you choose to place in it, you may set up a living trust throughout your lifetime. A trustee, who may be you or someone else of your choosing, is in charge of managing the trust. If you designate yourself as trustee, you may choose a replacement trustee to take over in the event of your decease or incapacity.

Revocable living trusts and irrevocable living trusts both exist. You have greater power with revocable trusts since you may alter their conditions anytime you choose. Irrevocable trusts are normally irrevocable, but they may protect your assets from inheritance taxes and help you become more eligible for Medicaid benefits if you ever need them.

Trusts that are irrevocable need more effort and money to create and keep up with. Additionally, it’s important to keep in mind that in 2022, federal estate taxes will only become applicable to estates with a value of $12,060,000 or more.

The words “living trust” and “revocable trust” are sometimes used interchangeably since irrevocable trusts are less frequent.

Advantages of a Living Trust

There are a number of benefits to transferring your house into a living trust as opposed to merely leaving it to your heirs in your will. The main benefit is that property held in a trust is exempt from probate. This may make it easier for your beneficiaries to take possession of the property and handle the reverse mortgage.

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If you move permanently into a nursing home, for example, a trust may enable you to leave your house to your heirs before you pass away. Gift taxes, however, can apply to you. A third possible benefit of a living trust is that it is often harder to contest than a will, in the event that your heirs disagree with the way you choose to distribute your assets.

Remember that the house will already avoid probate if the person you want to inherit it (such your spouse or a co-borrower) is already listed on the deed. In places where such documents are permitted, the same holds true if you have a transfer on death deed.

If you leave someone your house before you pass away, they could have to sell it using your cost basis rather than the stepped-up basis for which they would otherwise be qualified. They may get a tax bill (or a larger tax bill) as a consequence of this.

Combining a Reverse Mortgage with a Living Trust

You may submit a HECM application for a property owned by a living trust. With the lender’s permission, you may convert a house that has a HECM into a living trust. In any case, the benefits of being in a living trust for your house will apply.

The trust beneficiary, who might be either you or your spouse, has to be at least 62 years old and fulfill other HECM eligibility conditions. Contingent beneficiaries of the trust, such as your children, are people who are not required to fulfill those criteria. The assets in the trust will pass to the contingent beneficiaries upon the death of the beneficiary, at which time the reverse mortgage will become due and payable precisely as it would be in the absence of a trust.

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As long as one or more of the original borrowers still owns the property and resides in it, the reverse mortgage will not become payable if you elect to dissolve the trust in the meantime.

How much does a living trust cost?

If you employ a lawyer to set up a living trust, the cost can range from $1,200 to $2,000, depending on the state you live in and the complexity of your estate. If you’re feeling daring, you might attempt to create one on your own for far less money by purchasing an instruction manual or using internet software. But you must be very certain that you fully comprehend the procedure, or you could not receive a favorable outcome.

What is a transfer on death deed?

A transfer on death deed enables your house to pass to your beneficiaries after your passing without going through the probate procedure in places where it is permitted. It may be used in place of a living trust in that manner.

How long does probate take?

The American Bar Association estimates that the probate procedure takes an average estate six to nine months to complete.

The Bottom Line

You may transfer your house with a reverse mortgage into a living trust. If you are otherwise qualified and your house is already in one, you may be able to get a reverse mortgage on it. When it comes to transferring property to your heirs after your death, living trusts offer several benefits over wills. A living trust, however, could seem like an unnecessary investment to many individuals.

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