A reverse mortgage used for estate planning affects distributions to heirs. These loans deserve careful consideration because of payment options.
A reverse mortgage is treated similarly as other conventional types of real estate loans for estate planning purposes. The primary exception relates to the non-recourse feature of these loans. This feature creates a valuable option without personal liability for all parties involved.
Reverse Mortgage Estates
A reverse mortgage survives the death of the first spouse and allows continuous occupancy by the surviving spouse. The loan becomes due only when the last remaining spouse vacates the home permanently. In most situations, death or absence for 12 months are events of abandonment that initiate collection of the loan. The 12-month absence rule may be a cause for concern for many older homeowners. If unexpected health problems require extended hospitalization, a lender may declare home abandonment even though illness and hospitalization are involuntary.
Heirs and Options
The heirs of an estate may pay off a reverse mortgage by refinancing with a traditional mortgage or using any other convenient means. Alternatively, if the balance owed is greater than property value, collateral may be surrendered in full satisfaction of the debt. Because of the non-recourse feature, neither the estate nor the heirs are responsible for a delinquency balance if collateral is worth less that the pay off balance. This unique feature of non-recourse loans makes them a highly attractive as estate planning tools.
Remaining Balances
At the time of collection of a reverse mortgage, the remaining balance includes all principal advances and accrued interest since the inception of the loan. If the last surviving spouse lives longer than an expected normal life span, the balance of a loan may be substantially more than the value of the supporting collateral. Nevertheless, so long as occupancy is maintained, no payment is due.
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