Creative Uses for Reverse Mortgages

Reverse mortgages can be used as an estate planning tool.

Typically used for income during retirement, reverse mortgages are finding their way into the affluent  marketplace as a vehicle for advanced planning.

Paul Savery, a  reverse mortgage consultant with Wells Fargo Home Mortgage in Sandwich, says some people have used reverse mortgages to buy or improve a second home.  With the substantial slide in real estate prices throughout the Sun Belt, some wealthy homeowners are going bargain-hunting with their reverse mortgage line available to quickly close on beautiful second homes being sold by distressed sellers.

Reverse mortgages can be used as an estate planning tool.    When working with retirees about reducing their estates and the subsequent estate tax, retirees are often reluctant to part with their hard-earned cash.  Whether it is fear of running out of money or thinking that they’ll spend their way down to an un-taxable level for their estate – this reluctance to make gifts is common even for the very wealthy.

The concept is that making gifts reduces your gross estate, which, in turn, will reduce any estate or death taxes that may be due.  One of the most utilized techniques with estate reduction gifts is the purchase of life insurance in an irrevocable trust.

This later creates a very large amount of cash from the ultimate death benefit that can be received by beneficiaries both income-and estate-tax free.  Using the proceeds from a reverse mortgage to pay life insurance premiums is in effect using double leverage for a very low risk move.  The biggest risk here is the policy itself – make sure that you buy a policy that is guaranteed for life from a highly-rated life insurance company.

A similar approach would involve using the proceeds from your reverse mortgage to acquire long-term care insurance.  Both the mortgage and the long-term-care insurance may protect your home from long-term illness and health-care costs.

Another creative use comes next year with the repeal of limits for Roth IRA conversions.  Making a Roth IRA conversion is an expensive move for current income taxes – but for the wealthy, it is an opportunity to create a financial legacy for the next generation with tax-free Roth IRA assets.  The ability to obtain a reverse mortgage could make utilization of the Roth conversion opportunity coming our way for 2010 even sweeter.  

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John P. Napolitano
U.S. Wealth Management
uswealthcompanies.com
Phone: (781) 849-9200
 
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