National Care Planning Council

I am a member of the National Care Planning Council. For more information about this organization, please click on the following link: http://www.longtermcarelink.net/ncpc.htm

Deficit Reduction Act of 2005 and Reverse Mortgages

Both houses of Congress passed (by the narrowest of margins) new legislation that the President signed into law on February 8th, 2006. This bill, the Deficit Reduction Act of 2005 (DRA 2005), was “presented” as cost-cutting legislation and it does that (via cuts in many social programs), but through changes created in this legislation, it will dramatically effect both the estate and long-term care planning for many senior homeowners.

The key issues are:

- It will extend Medicaid's "look-back" period for all asset transfers (gifts) from three to five years and change the start of the penalty period (for the value of those transferred assets) from the month after the date of transfer, to the date when the individual [who transferred the assets] applies for Medicaid.

- The law also will make any individual with home equity above $500,000 ineligible for Medicaid nursing home care, and states will have the option to raise this threshold only to as high as $750,000

- It will establish new rules for the treatment of annuities, including a requirement that the state be named as the remainder beneficiary.

- This new legislation will allow Continuing Care Retirement Communities (CCRC) to require residents to spend down their declared resources before applying for medical assistance. It will also set forth rules under which an individual's CCRC entrance fee is considered an available resource.

- It requires all states to apply the so-called “income-first” rule to community spouses who appeal for an increased resource allowance based on their need for more funds invested to meet their minimum income requirements.

- The new law will extend long-term care partnership programs to any state [currently there are only four states offering Partnership Programs].

This legislation will affect the work of elder law/trust & estate attorneys, long-term care specialists and reverse mortgage brokers to assist seniors in protecting themselves accordingly.

Reverse mortgage programs can be utilized to help senior homeowners deal with the changes created by the DRA 2005 in the following ways:

- A reverse mortgage can be the source of funds to pay for nursing home care during the Medicaid penalty period before Medicaid payments begin should the homeowner have gifted assets within the (phased in) 5-year look-back period.

- A reverse mortgage will reduce the home equity in a property upon closing which will allow the homeowner to qualify for Medicaid. Example – a 70-year old homeowner can reduce their home equity in a $600,000 home by taking an FHA HECM reverse mortgage and withdrawing $100,000, thereby leaving a home equity balance of $500,000 – which would allow them to qualify for Medicaid. The borrower can then withdraw additional funds from this reverse mortgage [of which Medicaid may not make a claim, because it is not considered either income or a liquid asset] and use it for whatever purpose they wish (probably to pay for additional care that Medicaid may not provide).

- A reverse mortgage can be used to supplement the income of a community spouse without affecting the “income first” rules

- A reverse mortgage can be used to fund the premium of a Long-term Care Insurance Policy. By doing so, the homeowner can purchase the LTCi they may need (provided they qualify for the insurance) without affecting their current or future cash flow. They can literally use a little bit of their house to protect their whole estate.

- A reverse mortgage can be used to protect a significant amount of liquid assets in the future from Medicaid. Reverse mortgage funds borrowed today, can be refunded with other liquid assets in the future prior to applying for Medicaid. Medicaid rules allow for the refunding of debt against a home before these liquid assets can be claimed by Medicaid.

In addition, the legislation incorporates provisions in the original budget bill passed by the Senate closing certain asset transfer "loopholes," among them:

- The purchase of a life estate will be included in the definition of "assets" unless the purchaser resides in the home for at least one year after the date of purchase.

- Funds to purchase a promissory note, loan or mortgage will be included among assets unless the repayment terms are actuarially sound, provide for equal payments and prohibit the cancellation of the balance upon the death of the lender.

- States will be barred from "rounding down" fractional periods of ineligibility when determining ineligibility periods resulting from asset transfers.

- States will be permitted to treat multiple transfers of assets as a single transfer and begin any penalty period on the earliest date that would apply to such transfers.

- The adult children of elderly parents in many states may be held liable for their parents' nursing home bills

In light of these new regulations created through the DRA 2005, a reverse mortgage can be strategically utilized to help senior homeowners retain their independence, meet their current needs, strengthen their financial future and protect their legacy.

Common Misconceptions About Reverse Mortgages

• The borrower(s) must sign their home over to the bank. -- NO.
The title to the property does not change. A reverse mortgage is just a lien, the same as a traditional mortgage or home equity line. The borrower retains full disposition rights to their property. If the borrower(s) decide to sell or transfer their home, the reverse mortgage balance will be repaid or refinanced (as would any traditional mortgage balance)

• The bank will take the home upon death of the borrower(s). -- NO.
At the time of the borrower(s) death, the property will enter probate and the beneficiaries can either refinance the balance of the reverse mortgage and keep the home, or sell the property, whereupon the loan is repaid and the remaining equity belongs to the estate.

• The borrower(s) can withdraw most or all of the equity out of their home. -- NO
The borrower(s) cannot withdraw all of the equity in their home. The lender determines the loan amount. The older the borrower(s), the larger the loan amount that will be made available. Seniors can receive the proceeds as a lump sum, a line of credit, a monthly payment, or any combination of these options.

• Closing costs are extremely high. -- NO.
For some reverse mortgage programs, the closing costs are significant, but still far less than one year of typical appreciation on a $300,000 home. Some programs require a one-time mortgage insurance premium payment that protects the homeowner and the lender. There are some private reverse mortgage programs that have little or no up-front closing costs. All closing costs (if any) are withdrawn from the gross loan amount, so that the borrower(s) need not bring a check to the closing.

• Interest rates are high and are charged on the total loan amount. -- NO.
Interest rates are low -- currently around 3.80% (11/2004) on some programs. All reverse mortgage programs are adjustable rate loans. All have lifetime interest rate caps. Interest is only charged on the borrowed loan amount – not the total loan available.

• Money received is reportable and can affect the homeowners' current government benefits. -- NO.
Proceeds from a reverse mortgage are not considered income (by the IRS) and therefore do not affect the benefits from Social Security, Medicare and are not generally subject to attachment by Medicaid.

Reverse Mortgages – A Brief Summary

A reverse mortgage may be one of the best-kept secrets in the world of retirement financing. For senior homeowners, 62+ years old, these easy-to-qualify-for, low-interest rate loans offer the opportunity to tap into some of the unexpectedly large accumulation of equity that has built up in their property. Reverse mortgage programs allow seniors to withdraw money, tax-free, without relinquishing title to the property, and without requiring a mandatory monthly repayment. These funds can be received as a lump-sum, a line of credit, a monthly payment, or any combination of these options. In the end, the senior homeowner has benefited from living out their lives in their home for as long as they are able without financial worry.

Reverse Mortgages – As a Financial Planning Tool

Reverse mortgage programs are designed for homeowners 62+ years old. These easy-to-qualify-for, low-interest rate, loans offer the opportunity to tap into some of the unexpectedly large accumulation of equity that has built up in their property. Monies withdrawn are tax-free and can be used for any purpose the homeowner wishes. Examples range from buying a vacation or investment property, to gifting funds to children and/or grandchildren, to establishing trusts, to purchasing long-term care insurance and/or life insurance. The funds from a reverse mortgage can be used to strengthen the financial future of the senior homeowner.

Reverse Mortgages – Using Your Home to Protect Your Home

One of the greatest fears senior homeowners have today is that of losing their home due to the costs of extended medical care treatment. For seniors who can qualify for long-term care insurance, the costs of these insurance premiums is money well spent. While long-term care premium costs may look expensive if paid out of pocket, these same costs are tiny when compared to the value of a typical home. Senior homeowners, 62+ years old, can access some of this equity through easy-to-qualify-for, low-interest rate reverse mortgage loans and tap into some of the unexpectedly large accumulation of equity that has built up in their property. In 2003, The National Council on Aging (NCOA) began a program called Use Your Home to Stay at Home™ to promote the increase in the appropriate use of reverse mortgages so that millions of homeowners can tap home equity to pay for long-term care services or insurance.

Reverse Mortgages – Refinancing Out of a Current or Impending Foreclosure

In order to make ends meet, many senior homeowners have borrowed money from their homes in the form of a mortgage or home equity line of credit, and now find themselves’ unable to make the mandatory monthly repayments. These borrowers have two choices – sell their home or refinance with a reverse mortgage. A reverse mortgage requires no income, asset or credit qualification, and does not change the title to the property. The reverse mortgage will repay the borrower’s current outstanding loan balance (up to certain loan limits), thereby ending any further monthly mortgage repayment bills. The borrowers may also have additional reverse mortgage funds available to them, helping them to continue to stay in their home for as long as they wish. When the property is finally sold (at the borrower’s discretion) the balance of the reverse mortgage loan is repaid, with the remaining equity belonging to the borrowers or their heirs.

Reverse Mortgages In Trusts and Life Estates

Many senior homeowners are planning ahead in order to protect or enhance their legacy. When implemented properly, the use of a Trust or Life Estate can be an effective means through which a home, typically their largest single investment, can be transferred to their beneficiaries prior to the seniors’ passing. The seniors retain the right to live in the home for as long as they wish, but they may still need, or want, additional funds to do so. A reverse mortgage program can be utilized within a revocable trust or a life estate to provide this extra money. When the beneficiaries ultimately take over the property, the reverse mortgage must be refinanced by the beneficiaries, or the property can be sold, the reverse mortgage repaid and the remaining equity belongs to the beneficiaries.

Reverse Mortgages and Medicaid

Many senior homeowners are unable to qualify for long-term care insurance and may someday face the prospect of extended medical care for themselves and/or their spouse. If personal net worth is limited, government long-term medical care assistance programs have specific guidelines relating to the finances of both the infirmed and their partner. A reverse mortgage can provide additional funds outside of these restrictions and can enhance the lives of everyone involved. As long as the proceeds are spent, and not invested or gifted away, this money can be used to augment allowable income under Medicaid guidelines. These easy-to-qualify-for, low-interest rate, loans offer the opportunity to tap into some of the unexpectedly large accumulation of equity that has built up in a senior homeowner’s property. Although a reverse mortgage does not prohibit Medicaid from placing a lien upon a home, it is a lien behind the debt senior homeowners accumulate spending on themselves however they wish.