Reverse Mortgage Trusts

Question: My mother owns her home and is considering putting it into an irrevocable trust. She is concerned that if in the future she wanted to take a Reverse Mortgage on the property, she would not be able because the house is owned by a trust, is that correct?

Answer:  The mere fact that a home is owned by an irrevocable trust does not create a scenario where a reverse mortgage is out of the question. An irrevocable trust can take many forms, I assume that your mother is thinking of transferring her home into and irrevocable Medicaid qualifying trust for the purpose of protecting any equity she has in the home should a time come when she requires long term care. As you are likely aware, once an asset has been transferred into a properly drafted trust of this type, and five years have passed, that asset cannot be counted as a resource for the purpose of determining Medicaid eligibility. For many of our clients their home is their most significant asset and protecting it from the cost of long-term care is a great concern, and the comfort of knowing that they can call upon the equity in their home for un-met expenses provides a sense of stability and comfort.

A reverse mortgage is a type of mortgage where a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. A reverse mortgage can provide a homeowner access to this equity in either a lump sum or stream of income. The amount of equity available to the borrower will be calculated taking into account the value of the home as well as the age of the borrower. One factor which will not affect the loan application is the credit of the homeowner/borrower. Up until recently, in most cases homeowners were faced with the choice either of protecting their home from the cost of long- term care or leaving the equity accessible should a time come that they needed to rely on a reverse mortgage. Current products available within the banking industry now offer reverse mortgages on properties owned by irrevocable trusts, assuming certain language is contained in those trusts.   The significance of this is that oftentimes, even with a reverse mortgage the home retains a significant amount of equity. Protecting that equity from the cost of long-term care is now possible. Moreover, individuals who have held off on transferring their home to an irrevocable trust for fear of being unable to tap into the equity can now make that transfer knowing that if a time comes that they choose to take a reverse mortgage, it will be possible. It is important to note that reverse mortgages are not for everyone and before entering into a contract it is crucial that you weigh all of your options and consider both the pros and cons of the reverse mortgage.