How to Understand Reverse Mortgages
By George A. Mills
In today’s struggling economy many elderly folks are considering reverse mortgages in order to acquire funds to help their children through rocky times. There are pros and cons to this strategy, and homeowners should examine them thoroughly before taking this drastic measure. Common questions involved pertain to taxability of the funds obtained from a reverse mortgage, taxes involved with gifting the money to children, and the effect of surrendering equity on Medicare and Medicaid eligibility. Anybody considering taking out a reverse mortgage, also known as a home equity conversion mortgage, should consult an attorney specializing in elderly-specific law.
First of all, funds gained from a reverse mortgage are not considered income, and are therefore not taxable for the homeowner. Any funds given to children, however, are considered a gift and thus subject to applicable gift-taxes. As far as Medicare and Medicaid are concerned, the former is considered insurance, and would be unaffected by a reverse mortgage. Medicaid, on the other hand, is considered a means-tested program, so acquisition of funds through a reverse mortgage could have an impact on eligibility. Medicaid eligibility requirements do vary widely from state to state.
You should beware, however, of trying to manipulate the system to draw down equity in the hopes of gifting the money in order to improve your chances to qualify for Medicaid. This trick has been tried many times only to leave the elderly without Medicaid and facing charges. If the money coming in from a reverse mortgage is spent as it comes in, however, it should have no impact on Medicaid eligibility; it’s when that money sits in the bank thus becoming an asset that it can become an issue.
So be sure to thoroughly research all aspects of your situation and then consult with elder-specific law experts before seeking one. Present needs, future care expenses for the parents, and any tax issues should all be looked at, as well as the pros and cons of leaving the house as an inheritance after the parents pass. Investigate how local and state laws affect the issues at hand and tread carefully, as any consequences from a bad decision can linger long after the parents are deceased.
George Mills specializes in Asheville real estate and Waynesville real estate.
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