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Reverse mortgage terms may come as a nasty surprise to heirs

One purpose of estate law is to help individuals define how their assets will be distributed upon their death. Taking time to do things right may avoid the nasty surprise facing some beneficiaries of a home that is subject to a reverse mortgage.

Notably, only elders 62 years of age or older may qualify for this type of borrowing arrangement. Under its terms, an elder may borrow against the equity in his or her home, with no repayment obligation until he or she moves or passes away. The option can provide funds to elders experiencing cash flow problems in their retirement. However, that benefit comes with a catch: Heirs may be threatened with foreclosure from the lending company when the loan becomes due.

There are federal rules that apply to reverse mortgage lenders. For example, heirs that inherit the property subject to a reverse mortgage are supposed to be given an option of settling the loan, typically at a portion of the full amount. However, that calculation may be based on a home’s current value, rather than the value at the time the reverse mortgage was executed. Not surprisingly, some heirs may be facing foreclosure of their inherited property. 

An attorney knows that estate planning may also involve a financial analysis of an individual’s future expenses. In addition, the vast array of estate planning documents can also cover matters such as the guardianship of minor children, health care directives in the event of incapacitation, and tax minimization strategies. With the help of an attorney, an individual can plan not only for his or her retirement needs, but also for how assets will transfer to heirs.

Source: New York Times, “Pitfalls of Reverse Mortgages May Pass to Borrower’s Heirs,” Jessica Silver-Greenberg, March 26, 2014

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