Critter Corner: The Best Way to Leave Assets to Minor Children

Dear Commander Bun Bun,

My husband and I were talking about doing estate planning and how to provide for our minor children. Of course, we want to leave almost everything to our children, because we want to make sure that they are provided for in the event something happens to us. But we couldn’t trust them with the inheritance at this time, since they are still young and immature. If we name a guardian for our children, will that person be able to use the inheritance to take care of them? Is the Will the right vehicle to do this type of planning, or is there a different strategy you recommend?

Thanks!

Taye Kincare-Ofthem

—-

Dear Taye,

Quite often, children inherit money, real estate, stocks, CDs and other investments from their parents, grandparents, or other relatives. Many parents think that if they name a guardian for their minor children in a Will and something happens to them, the named person will automatically be able to use that inheritance to take care of the children. Unfortunately, that’s not what happens.

When the Will is probated, the court will appoint a guardian to raise the child; usually this is the person named by the parents. But the court, not the guardian, will control the inheritance until the child reaches legal age (18 in Virginia and most states). At that time, the child will receive the entire inheritance. Most parents would prefer that their children inherit at a later age, but with a “simple Will,” you don’t have that choice, nor would a “simple Will” in this situation make anything simple. Once the child attains the age of majority, the court must distribute the entire inheritance to the child in one lump sum.

A much better strategy is a Revocable Living Trust, the preferred option for most parents and grandparents. With a Revocable Living Trust, the person(s) you select as successor trustee(s), not the court, will be able to manage the inheritance for your minor children or grandchildren until they reach the age(s) you want them to inherit. In addition, each child’s needs and circumstances can be accommodated, just as you would do. And, assets that remain in the trust can stay protected from the courts, irresponsible spending, and creditors (including divorce proceedings).

To learn more about estate planning for your specific situation, you should make an appointment for a no-cost introductory consultation with Mr. Farr.

Hop to see you soon,

Commander Bun Bun

Critter Corner: The Best Way to Leave Assets to Minor Children

Dear Commander Bun Bun,

My husband and I were talking about doing estate planning and how to provide for our minor children. Of course, we want to leave almost everything to our children, because we want to make sure that they are provided for in the event something happens to us. But we couldn’t trust them with the inheritance at this time, since they are still young and immature. If we name a guardian for our children, will that person be able to use the inheritance to take care of them? Is the Will the right vehicle to do this type of planning, or is there a different strategy you recommend?

Thanks!

Taye Kincare-Ofthem

—-

Dear Taye,

Quite often, children inherit money, real estate, stocks, CDs and other investments from their parents, grandparents, or other relatives. Many parents think that if they name a guardian for their minor children in a Will and something happens to them, the named person will automatically be able to use that inheritance to take care of the children. Unfortunately, that’s not what happens.

When the Will is probated, the court will appoint a guardian to raise the child; usually this is the person named by the parents. But the court, not the guardian, will control the inheritance until the child reaches legal age (18 in Virginia and most states). At that time, the child will receive the entire inheritance. Most parents would prefer that their children inherit at a later age, but with a “simple Will,” you don’t have that choice, nor would a “simple Will” in this situation make anything simple. Once the child attains the age of majority, the court must distribute the entire inheritance to the child in one lump sum.

A much better strategy is a Revocable Living Trust, the preferred option for most parents and grandparents. With a Revocable Living Trust, the person(s) you select as successor trustee(s), not the court, will be able to manage the inheritance for your minor children or grandchildren until they reach the age(s) you want them to inherit. In addition, each child’s needs and circumstances can be accommodated, just as you would do. And, assets that remain in the trust can stay protected from the courts, irresponsible spending, and creditors (including divorce proceedings).

To learn more about estate planning for your specific situation, you should make an appointment for a no-cost introductory consultation with Mr. Farr.

Hop to see you soon,

Commander Bun Bun

Why Every College Student Should Have an Incapacity Plan

Q. My 18-year old daughter, Madison, will be a freshman in college in the fall. At her high school graduation party, my friend Phil told me that he is already doing estate planning for his own daughter, and he told me that it is really important and I should do it for my daughter. Is this really something that a college student needs? My daughter doesn’t own any property or have any assets, except the used car I bought her for her birthday, which is actually still in my name so it doesn’t really belong to her. Does someone this young and with no assets really need an estate plan?

A. Graduating from high school and getting ready for college is an exciting time in a young adult’s life. However, with all the preparation that is necessary, most young adults and their families overlook one of the most important things they should do upon turning age 18: incapacity planning, which some attorneys call estate planning. Incapacity planning is typically done as a part of estate planning, but can also be done on a stand-alone basis outside of planning for the distribution of estate assets upon death.

Few 18-year-olds and their parents consider the need for an estate plan, simply because, as you mentioned, they do not have estates or families to plan for. However, your friend Phil is doing the right thing in being proactive. Why? Because in the eyes of the law, your daughter is now an adult, which makes having certain medical and financial documentation in place critical.

Here’s an example to help explain why: Let’s say two college students are coming home from a party and are in a car accident. One is seriously injured and unconscious. His or her mom and dad get a call that night, and jump into the car and set out for the hospital, fully expecting to talk to the doctors, sign off on medical care, and make key decisions during the child’s recovery. Although the parents expect to have a voice in the medical decisions, they come to find out that once children reach the age of majority, privacy laws generally protect their medical and financial information. In other words, parents are no longer entitled to see their child’s medical and financial records and make most decisions on their behalf.

In most cases, parents incorrectly assume that because they are paying for college or if the child is still living under their roof, that they have the right to make legal decisions, but that isn’t so once they turn 18 and become adults. The Health Insurance Portability and Accountability Act (HIPPA) protects the privacy of all adults’ medical records and may prohibit even parents from receiving medical information or making informed decisions for the child – even if that child is unconscious and unable to communicate. And, this is regardless of whether the child is living at home or is financially dependent on you.

What sometimes happens in these situations is that physicians will identify a parent as a health care advocate who has authority to make decisions on behalf of an adult child. But identifying a parent may not be easy in blended families where divorced parents and stepparents may not agree on a medical course of action. And this may happen when time is of the essence and every second counts.

Therefore, it is important for young adults to set up an incapacity plan that appoints trusted individuals to make medical and financial decisions in the event they are unable to do so.

Types of Documents a College Student Needs

At a minimum, here are the documents every college student should have:

1. Advanced Medical Directive

An Advance Medical Directive (which includes a Medical Power of Attorney) authorizes another person (called your “Medical Agent”), to make decisions with respect to your medical care in the event that you are physically or mentally unable to do so, as certified by two physicians.

This document allows a student to name an agent (presently his or her parent or parents) to receive vital healthcare information and make healthcare decisions for the student in the event the student is unable to do so, and permits a student to specify certain treatment preferences regarding such care. This document only becomes effective when a student cannot (or is unwilling) to make health decisions for himself or herself.

For added peace of mind, we register the Advance Medical Directives of our clients with DocuBank. We’ve heard too many horror stories, and we want to ensure that doctors and loved ones can immediately obtain your Advance Medical Directive so that our clients can get the best care.

2. General Financial Power of Attorney

A General Power of Attorney is the most important legal document that a person can have, and is an essential part of every Incapacity Plan and Estate Plan. A General Financial Power of Attorney (always “durable” when used in connection with estate planning) authorizes your agent, sometimes called “Attorney in Fact,” to act on your behalf and sign your name to financial and/or legal documents.

With a General Financial Power of Attorney in place, a designated agent could pay bills, handle insurance claims, maintain bank accounts, and take care of other financial matters for a young-adult, if the need arose. The power may become effective immediately or it may be “springing” – which means it only becomes effective upon the occurrence of a later event (e.g., a student’s incapacity as certified by two physicians).

3. Authorization to Disclose Protected Health Information.

The Health Insurance Portability and Accountability Act (HIPAA) sets out rules and limits on who can look at and receive an individual’s medical information. This document authorizes healthcare providers to disclose a student’s medical information to certain named individuals. In the unfortunate scenario where a student experiences a medical emergency, this document would give parents, or another named individual, the authority to receive information from healthcare providers regarding the student’s healthcare status and related information.

Why Now Is Also a Good Time to Update Your Own Estate Plan

When your child was under 18 years old, you could rest assured that, if you were to pass away before your child became an adult, your child would be taken care of by the guardian named in your Will (you do have one, right?).

Now that your child is no longer a minor, it is an ideal time to rethink your estate plan. Why? Because if you pass away, your child will not automatically be sent to live with a guardian. This could be a scary thought if your child still struggles to cook ramen noodles.

How A Trust Can Protect Your College Student

When you leave money and/or property in your Will to your college student, there’s a good chance your child might just blow it all on frivolous purchases, because the rations part of the human brain is not fully developed until age 25. If by chance your child saves the money wisely, the could still be taken away years later by creditors or a messy divorce.

If you don’t have one already, a Revocable Living Trust gives you control over what happens to the inheritance money. It will also keep the cash out of the hands of creditors and future ex-spouses. In addition, you can use a trust to spread out the cash your college student receives over time. For example, you might want to split up the money into yearly payments, or distribute a percentage of the trust at specific ages (for example, 33% at age 25, 50% of the balance at age 30, and the remaining balance at age 35).

Another thing parents can do is to create an incentive trust to motivate your child to do well when you’re no longer around to give your famous lectures. With an incentive trust, you’ll choose a trustee to manage your trust, and distribute funds when your beneficiary meets your requirements. For example, you might want to give your children a sum of cash when they graduate college, when they get married, or when they get their first full-time job after college.

Incapacity Planning is Important for Everyone

We here at the Farr Law Firm have strategies in place to help adults of all ages plan for themselves and their loved ones, whether you’re a young-adult, a middle-aged person, or a senior. If you or members of your family have not done Incapacity Planning or Estate Planning, or if you would like to make updates to your existing planning documents, please contact us as soon as possible to make an appointment for a no-cost initial consultation:

Fairfax Estate Planning: 703-691-1888
Fredericksburg Estate Planning: 540-479-1435
Rockville Estate Planning: 301-519-8041
DC Estate Planning: 202-587-2797

Why Every College Student Should Have an Incapacity Plan

Q. My 18-year old daughter, Madison, will be a freshman in college in the fall. At her high school graduation party, my friend Phil told me that he is already doing estate planning for his own daughter, and he told me that it is really important and I should do it for my daughter. Is this really something that a college student needs? My daughter doesn’t own any property or have any assets, except the used car I bought her for her birthday, which is actually still in my name so it doesn’t really belong to her. Does someone this young and with no assets really need an estate plan?

A. Graduating from high school and getting ready for college is an exciting time in a young adult’s life. However, with all the preparation that is necessary, most young adults and their families overlook one of the most important things they should do upon turning age 18: incapacity planning, which some attorneys call estate planning. Incapacity planning is typically done as a part of estate planning, but can also be done on a stand-alone basis outside of planning for the distribution of estate assets upon death.

Few 18-year-olds and their parents consider the need for an estate plan, simply because, as you mentioned, they do not have estates or families to plan for. However, your friend Phil is doing the right thing in being proactive. Why? Because in the eyes of the law, your daughter is now an adult, which makes having certain medical and financial documentation in place critical.

Here’s an example to help explain why: Let’s say two college students are coming home from a party and are in a car accident. One is seriously injured and unconscious. His or her mom and dad get a call that night, and jump into the car and set out for the hospital, fully expecting to talk to the doctors, sign off on medical care, and make key decisions during the child’s recovery. Although the parents expect to have a voice in the medical decisions, they come to find out that once children reach the age of majority, privacy laws generally protect their medical and financial information. In other words, parents are no longer entitled to see their child’s medical and financial records and make most decisions on their behalf.

In most cases, parents incorrectly assume that because they are paying for college or if the child is still living under their roof, that they have the right to make legal decisions, but that isn’t so once they turn 18 and become adults. The Health Insurance Portability and Accountability Act (HIPPA) protects the privacy of all adults’ medical records and may prohibit even parents from receiving medical information or making informed decisions for the child – even if that child is unconscious and unable to communicate. And, this is regardless of whether the child is living at home or is financially dependent on you.

What sometimes happens in these situations is that physicians will identify a parent as a health care advocate who has authority to make decisions on behalf of an adult child. But identifying a parent may not be easy in blended families where divorced parents and stepparents may not agree on a medical course of action. And this may happen when time is of the essence and every second counts.

Therefore, it is important for young adults to set up an incapacity plan that appoints trusted individuals to make medical and financial decisions in the event they are unable to do so.

Types of Documents a College Student Needs

At a minimum, here are the documents every college student should have:

1. Advanced Medical Directive

An Advance Medical Directive (which includes a Medical Power of Attorney) authorizes another person (called your “Medical Agent”), to make decisions with respect to your medical care in the event that you are physically or mentally unable to do so, as certified by two physicians.

This document allows a student to name an agent (presently his or her parent or parents) to receive vital healthcare information and make healthcare decisions for the student in the event the student is unable to do so, and permits a student to specify certain treatment preferences regarding such care. This document only becomes effective when a student cannot (or is unwilling) to make health decisions for himself or herself.

For added peace of mind, we register the Advance Medical Directives of our clients with DocuBank. We’ve heard too many horror stories, and we want to ensure that doctors and loved ones can immediately obtain your Advance Medical Directive so that our clients can get the best care.

2. General Financial Power of Attorney

A General Power of Attorney is the most important legal document that a person can have, and is an essential part of every Incapacity Plan and Estate Plan. A General Financial Power of Attorney (always “durable” when used in connection with estate planning) authorizes your agent, sometimes called “Attorney in Fact,” to act on your behalf and sign your name to financial and/or legal documents.

With a General Financial Power of Attorney in place, a designated agent could pay bills, handle insurance claims, maintain bank accounts, and take care of other financial matters for a young-adult, if the need arose. The power may become effective immediately or it may be “springing” – which means it only becomes effective upon the occurrence of a later event (e.g., a student’s incapacity as certified by two physicians).

3. Authorization to Disclose Protected Health Information.

The Health Insurance Portability and Accountability Act (HIPAA) sets out rules and limits on who can look at and receive an individual’s medical information. This document authorizes healthcare providers to disclose a student’s medical information to certain named individuals. In the unfortunate scenario where a student experiences a medical emergency, this document would give parents, or another named individual, the authority to receive information from healthcare providers regarding the student’s healthcare status and related information.

Why Now Is Also a Good Time to Update Your Own Estate Plan

When your child was under 18 years old, you could rest assured that, if you were to pass away before your child became an adult, your child would be taken care of by the guardian named in your Will (you do have one, right?).

Now that your child is no longer a minor, it is an ideal time to rethink your estate plan. Why? Because if you pass away, your child will not automatically be sent to live with a guardian. This could be a scary thought if your child still struggles to cook ramen noodles.

How A Trust Can Protect Your College Student

When you leave money and/or property in your Will to your college student, there’s a good chance your child might just blow it all on frivolous purchases, because the rations part of the human brain is not fully developed until age 25. If by chance your child saves the money wisely, the could still be taken away years later by creditors or a messy divorce.

If you don’t have one already, a Revocable Living Trust gives you control over what happens to the inheritance money. It will also keep the cash out of the hands of creditors and future ex-spouses. In addition, you can use a trust to spread out the cash your college student receives over time. For example, you might want to split up the money into yearly payments, or distribute a percentage of the trust at specific ages (for example, 33% at age 25, 50% of the balance at age 30, and the remaining balance at age 35).

Another thing parents can do is to create an incentive trust to motivate your child to do well when you’re no longer around to give your famous lectures. With an incentive trust, you’ll choose a trustee to manage your trust, and distribute funds when your beneficiary meets your requirements. For example, you might want to give your children a sum of cash when they graduate college, when they get married, or when they get their first full-time job after college.

Incapacity Planning is Important for Everyone

We here at the Farr Law Firm have strategies in place to help adults of all ages plan for themselves and their loved ones, whether you’re a young-adult, a middle-aged person, or a senior. If you or members of your family have not done Incapacity Planning or Estate Planning, or if you would like to make updates to your existing planning documents, please contact us as soon as possible to make an appointment for a no-cost initial consultation:

Fairfax Estate Planning: 703-691-1888
Fredericksburg Estate Planning: 540-479-1435
Rockville Estate Planning: 301-519-8041
DC Estate Planning: 202-587-2797

Is Social Security or Medicare Running Out of Money? What the 2016 Trustees Report Has to Say

Social Security is vital to Americans, providing workers and their families with retirement, disability, and survivors insurance benefits. Medicare is also an essential program for American seniors. Since its creation in 1965, Medicare has provided universal health care to millions. Both these programs play integral roles in our lives, and it would truly be a travesty if either of them stopped.

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of both programs. Last week, they issued their 2016 financial review of the programs, and it warns of shortfalls that could occur in the not-so-distant future.

Status of Social Security

Currently, sixty million people receive Social Security benefits totaling more than $74 billion each month, and the number of beneficiaries is expected to reach 76 million by 2025. Over the program’s 80-year history, it has collected roughly $19.0 trillion and paid out $16.1 trillion, leaving asset reserves of more than $2.8 trillion at the end of 2015 in its two trust funds. These are some of the highlights from the report, regarding Social Security:

•For now, Social Security’s trust funds are still growing. The combined trust fund assets will grow through 2019. Nevertheless, the population is aging, which makes more Americans eligible for retirement benefits, so even with interest earnings, the trust fund will gradually dwindle after 2019 and be depleted in 2034 if policymakers don’t act by then. Action in this case most likely means raising the Social Security tax rates, which is not popular politically, but is something that inevitably will need to be done.

•The projected year of exhaustion is the same as last year: Social Security’s retirement and disability trust fund reserves are projected to be exhausted in 2034, the same year that was projected in last year’s Trustees Report.

•What happens after the depletion of funds?: After trust fund depletion, annual revenues from the dedicated payroll tax and taxation of Social Security benefits will be sufficient to fund about three-quarters of scheduled benefits through 2090.

•Social Security Cost-of-Living Adjustment (COLA) will increase slightly next year: Social Security will provide a modest cost-of-living adjustment, increasing benefits by two-tenths of 1 percent next year.

•Social Security’s overall shortfall over the next 75 years is virtually unchanged from last year’s estimate of 2.68 percent of taxable payroll.

Status of Medicare

Medicare is the federal health insurance program created in 1965 for people ages 65 and over, regardless of income, medical history, or health status. Medicare plays a key role in providing health and financial security to 55 million seniors and younger people with disabilities. The program helps to pay for many medical care services, including hospitalizations, physician visits, prescription drugs, post-acute care, preventive services, and more.

•The report warned of a “substantial increase” in Medicare premiums in 2017 for about 30% of beneficiaries. Under assumptions in the report, the standard premium, now $121.80 a month, would rise to $149, and the change could be announced just weeks before Election Day on Nov. 8.

•The Medicare Hospital Insurance (HI) Trust Fund will have sufficient funds to cover its obligations until 2028, two years earlier than projected last year, but still 11 years later than was projected in the last report issued prior to the passage of the Affordable Care Act.

•Medicare now spends an average of nearly $13,000 per beneficiary, and this figure is expected to exceed $16,000 in five years, the report said. High-cost drugs are a major driver of Medicare spending growth.

•Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D, which provides access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.

•Congress can easily close the projected funding gap by raising the Medicare payroll tax — now 1.45 percent each for employers and employees — to about 1.8 percent, or by enacting an equivalent mix of program cuts and tax increases.

As you can see, both Social Security and Medicare face long-term financing shortfalls. According to the report, although both programs don’t face an imminent crisis, policymakers should act sooner rather than later to restore long-term solvency. The sooner they act, the more fairly they can spread out the needed adjustments in revenue and benefit formulas over time, and the more confidently people can plan their work, savings, and retirement around those adjustments. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.

Living on Social Security

The average Social Security retirement benefit is about $1,300 per month ($1,328 in 2015), and the maximum at full retirement age is more than $2,600 per month ($2,663 in 2015), but the exact amount you’ll get every month depends on how much you earned over your lifetime and how old you are when you start collecting. This isn’t much, when you consider cost-of living in this area. For suggestions on living on social security alone, please see our article on this subject.

What would happen if you or a loved one are living on Social Security alone and you or that loved one becomes incapacitated? Every adult over the age of 18 should plan ahead with an Incapacity Plan that includes a Financial Power of Attorney, an Advance Medical Directive, and an Advance Care Plan.

Medicare Doesn’t Cover Long-Term Care

Many of us don’t realize that Medicare does not pay one penny for long-term care. Medicare only pays for medical care delivered by doctors and hospitals, and in certain cases short-term rehabilitation which might take place in a nursing home.  When it comes to Medicaid, it gets very complicated to complete and file the application and, in most cases, it takes an experienced Elder Law firm, such as the Farr Law Firm, to help protect your assets first and then file for Medicaid. If you or a loved one need long-term care now or in the near future, the time to plan is now! Please call us any time to set up an appointment for a no-cost introductory consultation:

Fairfax Elder Law: 703-691-1888
Fredericksburg Elder Law: 540-479-1435
Rockville Elder Law: 301-519-8041
DC Elder Law: 202-587-2797

Critter Corner: I Am Nearing Retirement- What to Consider

Dear Angel,

The day I have been dreaming about for most of my adult life is almost here. In fact, at work yesterday, I met with human resources and my boss and started planning for my last days at work. With all this excitement comes some stress. As I near retirement, what are some things I should be considering? I want to make sure I didn’t miss anything.

Thanks!

Sue N. Imoutahere

—-

Dear Sue,

As your retirement date draws closer, you have probably spent some time thinking about how life will change once the day has come. If you are wondering where to begin with this part of your retirement picture, here are a few points that may help you focus:

1. Review your living expenses: Your living expenses will probably change after you retire. Some areas, such as commuting and dry cleaning costs will decrease, and others such as travel and health care costs may go up. If you haven’t done so, it’s a good time to estimate your monthly budget and revisit it periodically, both before and after retirement.
2. Consider your income sources: What amount of income will your IRA or employer-sponsored retirement plan provide for you? Do you have a pension? If so, what amount of income is it expected to provide? Does it provide an income stream to your survivor if you die? Social Security income and a strategy for claiming benefits need to be determined. You can obtain an estimate at the Social Security Administration’s website, ssa.gov.
3. Consider health care and long-term care costs: As you age, health care costs often increase. Medicare will cover some of these costs but be prepared to pay deductibles, co-pays and co-insurance. Long-term care expenses may also be part of the picture at some point and can be very expensive. A review of the long-term costs in your area and how to pay for it is a must. It would be prudent to set up an appointment with Mr. Farr to discuss planning for long-term care.

Congrats on your impending retirement. I look forward to seeing you in the office!

Purrs,

Angel

Attitudes Are Changing About Reverse Mortgages

Q. My mother-in-law, Rita, owns a home in Vienna that is valued at $675,000 and the amount owed on her mortgage is still around $300,000. When she retires next year, the monthly mortgage payment will be unaffordable for her, but she would still like to remain in her home.  She watches lots of late night television, and ever since she saw Fonzie from Happy Days peddling reverse mortgages, she is convinced that she should refinance her current conventional mortgage to turn it into a reverse mortgage.

Over the years, I have heard so many negative reports about reverse mortgages that I don’t think she should get one. Also, Rita had a stroke last year, and hasn’t quite recovered. If she needs nursing home care one day, won’t a reverse mortgage now cause a problem with getting her eligible for Medicaid later?

A. For senior homeowners who prefer to age-in-place, a reverse mortgage is an option to make staying in the home more affordable. A reverse mortgage, or Home Equity Conversion Mortgage (HECM) is a special type of home loan that lets you convert a portion of the equity from your home into cash. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the loan until the borrowers die or move out (such as to a nursing home) or sell the property.

Following years of negative reports that focused on the downsides of the industry, attitudes are strongly changing about Reverse Mortgages. And the laws surrounding first mortgages have changed significantly also in recent years, to make them much better for consumers. In fact, I frequently recommend reverse mortgage is to my clients for a variety of reasons, and recent surveys have found that 14% of retirees are seriously considering them.

According to a recent NY Times article, millions of Americans will not have enough money to retire comfortably — or at all — in the coming decades. Why? Pensions are now 401(k)s and have far fewer benefits and much greater risk. In addition, according to a Federal Reserve survey of people whose employers offer a retirement plan (and who don’t take advantage of it), nearly a third of them don’t participate because they say they “cannot afford to save any money.” Other participants claim that they are either “too confused by their choices,”“not eligible to participate,” or “have never gotten around to signing up.” Without savings or a retirement plan in place, home equity has become an increasingly important asset to consider tapping into, thus making reverse mortgages an option worth serious consideration for many people over the age of 62.

Experts say that “reverse mortgages may be the retirement answer during the modern era.” Here are some reasons why:

Reverse Mortgage Considerations and New Rules

With a reverse mortgage, there are new rules in place to ensure that you keep up with home maintenance, taxes, and insurance. The lender keeps a running tab of the interest and fees, and once you sell the property, move to a nursing home, or die,the bank is entitled to be paid back the money the bank originally loaned, plus accrued interest. This is typically done by selling the house after your death, or your heirs have the option to keep the house and write a check to Pay off the outstanding mortgage balance.

Reverse mortgages are complicated, and things have sometimes gotten messy for borrowers with surviving spouses or heirs who hoped to inherit the home. Federal regulators have tried to fix many of the problems in recent years, and in May, the Federal Housing Administration announced another attempt to strengthen the program.
The proposed rule (published last month) will reinforce changes that have already been made and add new consumer protections to make certain senior borrowers are sustained in their homes. These new changes would:

•Make certain that required HECM counseling occurs before a mortgage contract is signed;
•Require lenders to fully disclose all HECM loan features;
•Cap lifetime interest rate increases on HECM Adjustable Rate Mortgages (ARMs) to five percent.
•Reduce the cap on annual interest rate increases on HECM ARMs from two percent to one percent;
•Require lenders to pay mortgage insurance premiums until the HECM is paid in full, foreclosed on, or a Deed-in-Lieu (DIL) is executed rather than until when the mortgage contract is terminated;
•Include utility payments in the property charge assessment; and
•Create a “cash for keys” program to encourage borrowers’ heirs to complete a DIL and gracefully exit the property versus enduring a lengthy foreclosure process.
These new mortgage rules and previous changes help resolve some of the previous pitfalls that were associated with HECM loans, helping them regain popularity. For instance, borrowers need to seek third-party credit counseling prior to taking out the loan, and they have to demonstrate that they can manage home upkeep and pay property taxes and insurance.
Your mother can learn more about Reverse Mortgages by reviewing educational materials from the Department of Housing and Urban Development, the National Council on Aging and the Consumer Financial Protection Bureau.

Reverse Mortgages and Medicaid Eligibility

You asked about reverse mortgages and how they affect Medicaid Eligibility. As a general rule, I reverse mortgage does not affect Medicaid eligibility. Keeping money in a reverse mortgage line of credit in Virginia, and in most other states, does NOT count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource, which it would be for your mother as long as she is living in the home and receiving home-based Medicaid services.

However, transferring money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a countable resource and that could make her lose her Medicaid eligibility.  The important distinction between countable resources and exempt assets is quite complicated.

Reverse Mortgages and your Living Trust Plus(TM)

If you are one of our Living Trust Plus(TM) clients, or considering establishing a Living Trust Plus(TM) income only trust, it will come is very good news to you that you can obtain a reverse mortgage even though your house is titled inside of your Living Trust Plus(TM) income only trust. There are very complex rules for this, and there is only one lender in the country that I am aware of that offers this service, but they have a location in Virginia and I work with them regularly to help many of my clients establish reverse mortgage is inside their Living Trust Plus(TM) income only trust.

As always, if you or your loved one is facing the possible need for long-term care, you should get an opinion from a Certified Elder Law Attorney such as myself. Please call to make an appointment for a no-cost initial consultation:

Fairfax Medicaid Planning: 703-691-1888
Fredericksburg Medicaid Planning: 540-479-1435
Rockville Medicaid Planning: 301-519-8041
DC Medicaid Planning: 202-587-2797