Real Estate

Reverse mortgage borrowers are getting younger, and that may not be a good thing.

The age of reverse mortgage borrowers is dropping, according to a new study by MetLife. Unfortunately, reverse mortgages come with risks, so younger borrowers need to be careful.

Reverse mortgages allow homeowners who are at least 62 years of age to borrow money on their house. The homeowner receives a sum of money from the lender, based largely on the value of the house, age of the borrower, and current interest rates. The loan does not need to be paid back until the last surviving homeowner dies, sells the house, or permanently moves out.

The MetLife study found that younger borrowers are taking out reverse mortgages. Today baby boomers aged 62 to 64 make up 21 percent of reverse mortgage applicants. In 1999, only 6 percent of applicants were in this age bracket.  Of homeowners who are considering a reverse mortgage, 46 percent are under age 70.

This new trend toward younger borrowers could spell trouble. While reverse mortgages seem like a great idea, there are major downsides. The closing costs for the loans are much higher than for conventional mortgages, and younger borrowers receive less money because their life expectancy is longer. In addition, the borrower is still responsible for property taxes, homeowner's insurance, and maintenance. If the borrower runs out of money and can't pay the property taxes or homeowner's insurance, the loan will default, and the borrower could lose his or her house.

MetLife's study also found that most reverse mortgage applicants (67 percent) wanted to use the reverse mortgage to lower household debt compared to 27 percent who wanted to enhance their lifestyle and 23 percent who wanted to plan for the future. Instead of using a reverse mortgage to pay for health care that would allow borrowers to remain in their homes during their final years, borrowers are using reverse mortgages to cover short-term financial shortfalls. The MetLife study finds that strong reverse mortgage counseling is needed, and it cautions that homeowners need to consider whether to use their home equity to shore up their retirement financing or preserve this asset for major unexpected expenses in the future, such as health-related expenses that inevitably increase as people age.  (Funds for reverse mortage counseling were eliminated in last year's budget deal between Democrats and Republicans but have since been restored.) 

To read the MetLife study, click here.

For more information on reverse mortgages, click here.

Under our "system" of paying for long-term care, you may be able to qualify for Medicaid to pay for nursing home care, but in most states there's little public assistance for home care. Most people want to stay at home as long as possible, but few can afford the high cost of home care for very long. One solution is to tap into the equity built up in your home.

If you own a home and are at least 62 years old, you may be able to quickly get money to pay for long-term care (or anything else) by taking out a reverse mortgage. Reverse mortgages, financial arrangements designed specifically for older homeowners, are a way of borrowing that transforms the equity in a home into liquid cash without having to either move or make regular loan repayments. They permit house-rich but cash-poor elders to use their housing equity to, for example, pay for home care while they remain in the home, or for nursing home care later on. The loans do not have to be repaid until the last surviving borrower dies, sells the home or permanently moves out.

In a reverse mortgage, the homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates. For example, a 70-year-old borrower with a $200,000 house in Westchester County, New York, would be able to receive a maximum loan of $110,723 (based on 2009 figures). The lower the interest rate and the older the borrower, the more that can be borrowed. To find out how much you can get for your house, use the AARP's reverse mortgage loan calculator.

Homeowners can get the money in one of three ways (or in any combination of the three): in a lump sum, as a line of credit that can be drawn on at the borrower's option, or in a series of regular payments, called a "reverse annuity mortgage." The most popular choice is the line of credit because it allows a borrower to decide when he or she needs the money and how much. Moreover, no interest is charged on the untapped balance of the loan.

Although it is often assumed that an elderly person would want to use the funds from a reverse mortgage loan for health care, there are no restrictions--the funds can be used in any way. For instance, the loan could be used to pay back taxes, for house repairs, or to retrofit a home to make it handicapped-accessible.

Borrowers who take out a reverse mortgage still own their home. What is owed to the lender -- and usually paid by the borrower's estate -- is the money ultimately received over the course of the loan, plus interest. In addition, the repayment amount cannot exceed the value of the borrower's home at the time the loan is repaid. All borrowers must be at least 62 years of age to qualify for most reverse mortgages. In addition, a reverse mortgage cannot be taken out if there is prior debt against the home. Thus, either the old mortgage must be paid off before taking out a reverse mortgage or some of the proceeds from the reverse mortgage used to retire the old debt.

Reverse mortgages are somewhat underutilized now, but financial institutions, sensing an opportunity as the population ages and people live longer lives, are expanding their reverse mortgage programs.

The most widely available reverse mortgage product -- and the source of the largest cash advances -- is the Home Equity Conversion Mortgage (HECM), the only reverse mortgage program insured by the Federal Housing Administration (FHA). However, the FHA sets a ceiling on the amount that can be borrowed against a single-family house, which is determined on a county-by-county basis. High-end borrowers must look to the proprietary reverse mortgage market, which imposes no loan limits. On October 1, 2008, a new housing law took effect that increases the borrowing level on reverse mortgages. The national limit on the amount a homeowner can borrow is now $417,000. The limit can be increased to $625,000 in areas with high housing costs.

Is a Reverse Mortgage Right for You?

While reverse mortgages look like no-lose propositions on the surface, they also have some significant downsides. First, the closing costs for these loans are about double those for conventional mortgages. Closing costs on a reverse mortgage for the $200,000 home described above would be more than $10,000. These costs can be financed by the loan itself, but that reduces the money available to you.

Reverse mortgage payments also may affect your eligibility for government benefits, including Medicaid. Generally, these payments will not be counted as income as long as they are spent within the same month that they are received. If the funds are not spent, however, they could accumulate and push your resources over the allowable limits for Medicaid or SSI eligibility. In addition, payments from reverse annuity mortgages may be counted as income for purposes of Medicaid and SSI whether or not they are spent within the month they are received. This shouldn't be treated as income, since it simply involves withdrawing equity from one's home, but the state may view it differently since the funds come in a regular monthly check. In any case, you should consult with an elder lawyer in your state if you have any concern about how a reverse mortgage will affect your eligibility for federal benefits.

Also, bear in mind that if your major objective is to safeguard an inheritance for your children, a reverse mortgage may not be a good idea. As soon as the elderly person (or the survivor of an elderly couple) dies, it will be necessary to sell the home and much -- if not all -- of the sales proceeds will have to be paid to the lender. But if you have a pressing need for additional income and have no close heirs, or if you do not intend to benefit your children or your children don't particularly want to inherit the house, a reverse mortgage can be a way to supplement income, perhaps without jeopardizing Medicaid eligibility.

Reverse mortgages are complex products and borrowers are advised to acquaint themselves with the different options available and then carefully compare competing loan offerings. Following are two outstanding Web sites to get you started in that process:

• You can learn the basics about reverse mortgages from the AARP's excellent reverse mortgage Web site. The site includes a calculator for estimating the loan for which a borrower would be eligible. Go to: www.aarp.org/revmort
• For more details, background information, and supplementary materials, visit the National Center for Home Equity Conversion site at www.reverse.org

In addition, the names of FHA-insured lenders are available from the Federal National Mortgage Association (Fannie Mae), (800) 7-FANNIE.

Preserving your assets is possible even if you are about to enter into a nursing home. But the worst thing you can do is wait until you're no longer healthy to start planning. Instead, start planning while you are healthy!

Like most people, if you own a home, typically that's your greatest concern when you sit down to consider what assets are most in need of protection.

Consider an example: Jon and Mary, both 68, own a $250,000 home. They have two children. Neither has long-term care insurance. Jon's health is a source of concern, but his doctors are confident that based on current information, he will not need long-term care for at least another 7-10 years. This presents a great opportunity to plan in advance.

With our customized Nursing Home Protection+ Account solution, we can protect Jon and Mary's home from ever being taken if Jon goes into a nursing home. Even better, when Jon and Mary both pass on, the house won't be subject to estate recovery. In other words, their two children will be able to inherit the house, even if Medicaid wants to re-coup their costs by taking the house. 

This type of asset preservation requires special skills and must be done carefully after considering many factors.

If you're interested in this type of planning, please contact our office today. 

As an estate planning attorney, I hear about some of the craziest, outrageous estate planning matters gone awry. But those types of cases are outliers, and although they’re interesting, they’re uncommon. It’s the typical case gone wrong that really causes problems for more families.

For instance, in one relatively straightforward estate planning matter, I have a colleague who is currently representing a sister who is being sued by her sibling (brother) over some real estate their parents left them. When their parents died, they left their two children the house as equal owners – 50/50. The parents insisted that the children never had conflicts, and that the family was close. They couldn’t imagine how this simple matter could be anything but straightforward.

However, the client’s brother unfortunately got laid off in the recession, after having a secure job at a pharmaceutical company for many years. As a result, he could no longer afford his share of the expenses of the house. and needs to sell the real estate. The client doesn't want to sell as she feels they would take a big loss, as the housing market still has not turned around in many parts of the country. She would rather wait until the real estate market has recovered. Oh, and by the way, the parents named the two children as Co-Executors, something we always caution clients against doing.

Since they cannot come to an agreement, the brother sued the client to compel the property to be sold. The parents are probably rolling over in their graves, as the two siblings duke it out in court. Guess who wins? Attorneys, who spend plenty of time on cases like these and rack up many billable hours. It may take years for this family to recover from hard feelings and the conflict. Sadly, none of it needed to happen.

If you are leaving any property to your family after you are gone, talk to your estate planning attorney about establishing provisions in your will or trust to ensure that this never happens. Some ideas including setting money aside to handle the expenses (for many people, life insurance is an excellent option in a case like this). As I always say, none of us have a crystal ball, and you simply don’t know what will happen after you’re gone. Your estate plan needs to be crafted in such a way that takes into account multiple scenarios, and most importantly, the worst case scenario so that such a scenario can be avoided.

50/50 doesn’t seem so great after all. If your plan needs a fresh look, or if you know of someone who can use some assistance with estate planning, please call our office today at (215) 706-0200.

Joint ownership? Tenants in common? Right of survivorship? For many people, it is easy to get confused about how property is owned.  This week, we put together a quick guide for different ways to own property.

Our office regularly helps clients record property deeds for real estate and real property. We find it is important to educate our clients on the various ways that one can own property. There are tax advantages or disadvantages for every situation, which we will not be exploring today.

Joint Ownership With The Right Of Survivorship: (JTWROS) A common way to own real estate, two or more individuals own one piece of property together. All joint owners own the whole property (in other words, not easily partitioned). When one joint owner dies, the other owner automatically inherits the decedent’s share (survivorship). The decedent’s Will won't control how his or her share is distributed in this case, thus avoiding probate.

Tenants In Common: Two or more individuals own a share of the property. The property is easily partitioned. For example, you own 50% (the east side) and I own 50% (the west side). Upon death, the tenant in common’s share is passed through his or her Will. The advantage is that this type of property is easier to divide/partition, but doesn't avoid probate.

Tenancy By The Entirety: This is similar to Joint Ownership with Right of Survivorship above, but it reserved for legally married couples. This type of ownership offers additional creditor protection for the married couple. This method of ownership avoids probate.

Payable On Death (POD)/Transfer On Death (TOD) Accounts: These types of designations are typically found on a bank account or other financial account. An individual owns the property while he or she is living and has full control over it. The POD or TOD beneficiary only has access to the account upon the owner’s death. The advantage is that it passes directly to a person, and not through the Will, thus avoiding probate.

Life Estate: Used for real property, allows an individual to have a right to live in a property while he or she is living, but another person retains ownership interest. Can be advantageous for seniors, and for several situations, but you must be careful in setting up a life estate.

It’s important to know how your property and assets are titled, and who owns what. Whether it’s jointly held or not makes a big difference, for inheritance, planning and tax purposes. A good estate planning attorney always asks the client about how property is owned, and if the client doesn’t know, the attorney helps the client find out.

To schedule a consultation to review your estate plan, call us today at (215) 706-0200.

When you die in Pennsylvania, any property or assets that you leave to other people is subject to an “Inheritance Tax.” This is in addition to possible federal estate taxes (more on this in the coming weeks).

Typically, but not always, the Executor of the estate pays the inheritance tax on behalf of all beneficiaries of the estate before any of the property is distributed to beneficiaries.

Pennsylvania mandates that inheritance tax be paid 9 months after the decedent dies. You can get a discount if you pay within 3 months.

The PA Inheritance Tax rates for 2010, 2011 and beyond (at least as of now) are:

• 0% --  Legally married spouses
• 4.5% -- Children, Grandchildren
• 12% -- Siblings
• 15% -- All others

Most property is subject to inheritance tax. Jointly owned property is taxed at the share the person owned (i.e., if a person owned 50% of a property, that 50% share would be taxable).

One way to avoid inheritance tax in PA is to establish an irrevocable trust, or simply gift assets (unconditional giving, no strings attached) to someone. You must outlive them at least one year in order for the gift or trust to be complete so that no inheritance tax is due on that property.

Be careful what you gift to someone. If you gift someone a house, and you still want to live in it while he or she owns it, you could be making a risky move, especially if that person gets in trouble.

We would advise you not to do any inheritance tax planning without the assistance of a qualified estate planning attorney.  Please call our office today at 215-706-0200 to schedule a complementary appointment. Have a wonderful Thanksgiving holiday!

An estate plan completed by a law firm, by itself, is simply the legal documents that are drawn up to make sure your wishes are valid when you become incapacitated and when you die. 

However, an effective estate plan should be part of your overall retirement plan and wealth management plan. 

When our clients want to make sure their estate plan is seamless with their retirement plan, income plan and tax plan, we work with Franklin Retirement Solutions, a firm that specializes in retirement planning. Together, we can make sure all of the pieces of your plan fit together.

Here's just one of many examples of how a "piece meal" plan can go wrong: Client X has a financial advisor, who doesn't know the estate planning attorney. Client X has a special needs child. Client X asks attorney to protect assets for the special needs child, and attorney drafts both a will and sets up a special needs trust. Client X dies, and estate realizes that assets were not allocated properly (as a special needs child, putting assets directly into this child's name is a really bad idea). Client X's financial advisor was not aware of rules for special needs persons that are on public benefits. As a result, Client X's son almost lost his public benefits. 

By combining your financial planning and estate planning, your plan becomes a lot more effective. Most of our clients love having access to a financial planner, tax planner, Medicare supplement/Long-term care insurance specialist, and more.

To summarize, here are a few advantages of planning with this approach:

• All parts of your plan work together
• Ensures your plan will be reviewed and, if needed, updated more often
• Provides a more seamless transition to your heirs, since your affairs are in order.

We find that this type of planning is extremely beneficial to middle class clients. To learn more about our comprehensive approach to estate and retirement planning, please give our office a call today at (215) 706-0200.

Have you heard advice that you should sell your house to your kids now for $1? We advise you to schedule an appointment with us before you re-title property in your children's names.

Here are the reasons why you should reconsider this option and consider alternatives:

* Inheritance Taxes: Many people are under the impression that Pennsylvania Inheritance Taxes are more than they really are. Upon your death, property that is transferred to your lineal heirs (children) is taxed at a minimal 4.5% rate, that has remained steady for years and is not expected to change. 

* Step Up In Basis: By gifting your property to your children for $1, you could potentially be giving them more of a tax burden if they end up selling the property later. Be careful.

* Your Children Will Own The Property: Let me repeat that. Once you gift your home to your children, your children will own the property. Even if you are a joint owner with your children, they will still own a share. The question becomes.... What if your child gets in trouble... What if your child gets divorced... What if your child goes through bankruptcy... If you don't think it could happen to your family, you are playing the odds.

There are other reasons why you should re-consider jointly titling property.

If you are seeking to avoid probate, you may want to set up a revocable living trust, which is a way to avoid probate. Keep in mind that probate is relatively simple in Pennsylvania and not as costly for the most part. If you are not concerned about probate (and you probably shouldn't be), then using a will to convey your house is a good option.

If you have multiple homes (i.e., home in Pennsylvania, vacation home in New Jersey or Florida), you should strongly consider setting up a living trust. This will avoid ancillary probate (probate in other states), which could be a real hassle.

Remember: Your estate plan is important, and there is no "simple" estate plan. Make sure you consult with our firm before you deed your property to your kids. Let us help you explore your options. To schedule your complementary consultation, call our office at (215) 706-0200 or email us at info@jawatlaw.com