Some buzz has circled recently around one type of reverse mortgage that gives new meaning to the phrase: “All in the family.” Private reverse mortgages, which place a family member in the role of financier, are being talked about as one alternative to government-insured or proprietary products for seniors.
But, setting up a private reverse mortgage with one’s parents takes some effort, according to an estate-planning attorney in Westlake Village, Calif., quoted recently in a Wall Street Journal story. He recommended legally recording the loan so other family members can’t attack the arrangement after the parents pass away. He also advises paying for a title search to make sure there are no other liens on the house before making the loan.
In another advisory, one financial planner in Boston tells siblings to set up a private reverse mortgage for their parents using a limited partnership, rather than buying their house, when there has been substantial equity gain over time. In this way, the offspring benefit from a “stepped-up basis,” when the parents are gone, meaning there would not be capital-gains taxes when they sell, he explains.
Experts advise families to consider the array of potential complications with private reverse mortgages. Among them that:
- it ties up capital;
- there may be a decline in property value;
- gift taxes may have to be paid and, last but far from least;
- it could product conflict within the family.
On this last danger, experts say there could be a palpable “power shift” from parent to adult child. Would the financing son or daughter, for example, feel entitled to make decisions regarding their parents’ spending? Other issues include whether siblings would be resentful or jealous and whether parents might feel a loss of independence under such an arrangement.
Offering his assessment of private reverse mortgages, Rick Jurgens, advocate and investigative reporter with the National Consumer Law Center, Boston, said there are “legal dynamics and family matters” to consider. I’d be nervous about any third-party ‘hawking’ a private reverse mortgage,” Jurgens cautioned, adding that “it sounds like equity stripping of past” eras.
Written by Neil Morse