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In the first part of this series, we discussed the dangers of reverse mortgages for senior homeowners. Here, we’ll look at how these complex loans can negatively impact your family and estate plan.

For decades, reverse mortgages have been touted as an easy way for seniors to access extra money during retirement. Indeed, there was a time not too long ago when it was nearly impossible to watch TV without seeing at least one commercial extolling the benefits of these unique mortgages.

Yet, reverse mortgages turned out to be a financial disaster for many senior homeowners and their families. Tens of thousands of retirees lost their homes to foreclosure after defaulting on what was promised to be a “risk-free” way to convert the equity in their homes into cash.

Moreover, reverse mortgages were aggressively marketed mainly to low-income homeowners, who possessed minimal financial assets outside of the equity in their homes—the very people most likely to default. And though the federal government has recently enacted new laws to better protect seniors, reverse mortgages are still being hyped as a safe way for retirees to obtain much-needed cash.

Last week, we talked about how reverse mortgages work and discussed the devastating effects they can have on senior homeowners and their spouses when things go wrong. Here, we’ll cover the potential risks reverse mortgages pose for your family and estate plan.

When it comes to reverse mortgages, you must not only consider the negative effects such loans might have on you while you are living, but also how they could affect your estate and family when you die. Like any loan, a reverse mortgage is a debt that decreases the value of your estate. But unlike most loans, the balance of a reverse mortgage increases with time, rather than decreases.

With a traditional mortgage, you accrue equity and lower the balance of the loan with each payment you make. Upon your death, your estate receives the net equity from your home, minus the balance, if any, remaining on your mortgage. So in most cases, the longer you hold a traditional mortgage (and the more payments you make), the more value your home will add to your estate.

But with a reverse mortgage, it’s the exact opposite.

With a reverse mortgage, you’re taking out a loan against the equity you already have in your home. Since you’re receiving payments from the lender, rather than making them, the equity you have in your home decreases over time, while your loan balance increases. Thus, the longer you hold a reverse mortgage, the less value your home is likely to add to your estate.

If you take out a reverse mortgage, you can still leave your home to your family in your estate plan. However, you’ll not only leave your loved ones a less valuable asset, but they’ll also have to pay off the balance of the loan after you die, otherwise the lender will foreclose.

Whomever you select to inherit your home will typically get six months to pay off the reverse mortgage. And they should move as quickly as possible because until the loan is settled, interest on the balance and monthly insurance premiums will continue to eat into any remaining equity.

Unless your family has enough money on hand to fully pay off the reverse mortgage upon your death, they’ll probably end up having to sell the home. If so, the proceeds from the sale can be used to pay off the loan (including all fees and interest), and your family keeps any remaining equity. And this is the best-case scenario.

While reverse mortgages are designed to stay within the equity value of your home, this only works as long as home values are rising. If home values crash, like they did during the recession, the balance of your reverse mortgage could end up exceeding the market value of your home.

The good news is reverse mortgages are “non-recourse” loans insured through the Federal Housing Administration (FHA). This means your family won’t ever owe more than the home’s appraised value, and lenders can’t come after your family or estate to recoup their loss. If your reverse mortgage balance exceeds your home’s value at the time of your death, your family is only responsible for paying the lender 95% of the home’s appraised value.

For example, let’s say your home is appraised for $100,000, but the reverse mortgage balance is $200,000. To keep the home, your family would need to pay $95,000—95% of the $100,000 market value. Federal mortgage insurance covers the remaining amount.

Lenders, however, still make back their money. If your home’s sale doesn’t meet the lender’s expenses, an FHA fund insuring the loan pays the difference. Not surprisingly, this fund is currently more than $13.6 billion in the red, which reflects just how risky reverse mortgages can be.

So in this scenario, your family would have to go through all of the hassle of selling the home and end up with nothing to show for it. In such a case, your home would be more of a burden than a benefit to whomever ends up inheriting it, which is the exact opposite of how your estate plan is supposed to work.

Given this, unless there’s equity in the home, your family would have little incentive to sell the property and may want to simply hand it over to the lender to avoid the time and expense of foreclosure. Known as “deed in lieu of foreclosure,” your loved ones can do this by signing the home’s deed over to the lender.

Obviously, the best course of action is to never take out a reverse mortgage in the first place, but if you already have a reverse mortgage on your home, it’s absolutely critical that your family knows about it. This is something that you must not hide from your loved ones. If you have a reverse mortgage, talk to your family now to discuss the available options.

Telling your family that you’ve taken out a reverse mortgage may be embarrassing, but if your family is unaware of the loan and you die or need to move into a nursing home, they’re in for a potentially awful surprise. Indeed, your adult children may be counting on your home’s equity to help cover the costs of your long-term care and/or funeral expenses, so they’ll need to know as soon as possible to make other arrangements.

And once you’ve spoken to your loved ones, mitigate any potential fallout through proactive planning strategies.

The vast majority of seniors should simply avoid reverse mortgages all together. If you’re in desperate need of extra money during retirement, there are numerous safer options to consider.

And before you make any major life decision, especially one involving the family home, discuss the potential impact on your loved ones’ future. You never know when one seemingly minor choice might end up causing all kinds of trouble for your family down the road.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

Want to know a proven way to live a more fulfilling life?

All you have to do is fully accept the fact that one day you’re going to die.

“I am of the nature to die. There is no way to escape death.” –Upajjhatthana Sutta

The unavoidable nature of death is a basic tenet found in every religion. Indeed, the acceptance of death is so important in Buddhism that “impermanence,” or the fact that everything born eventually dies, is at the top of the Buddha’s list of the three universal characteristics of existence.

Before religious practice, Tibetan Buddhists chant, “The whole world and its inhabitants are impermanent. The life of human beings is like a bubble. Death comes without warning; this body too will be a corpse.”

Such teachings may seem morbid, but they’re actually designed to awaken you from denial and inspire you to fully appreciate life because you never know when it will end.

Numerous individuals have discovered that contemplating and accepting their own mortality is a powerful source of happiness. It may seem counterintuitive, but this isn’t something only found in religious teachings; it’s also been demonstrated by modern science.

Countless healthcare professionals report that people facing terminal illness often experience an incredible sense of peace and fulfillment in the days and weeks before they die. Many of them describe the acceptance of death as a life-changing event, confessing they never knew what it meant to live until they knew they were going to die.

The same is true for many who undergo a near-death experience (NDE). After staring death in the face, they report that their lives have much greater meaning. They frequently make dramatic life changes because they know without a doubt that any day, even today, might be their last.

You’ve undoubtedly heard the key to happiness is to be fully present in each and every moment. This advice is also derived from acceptance of death. By accepting that death is inevitable, we’re inspired to embrace every second of our lives with more gratitude and joy because we know that our existence is so fleeting.

If you’ve been avoiding thinking about and preparing for death, you may be missing out on an incredible opportunity. What all of these experiences show us is that death is an essential part of what makes life so sweet.

One of the biggest steps in accepting death is to prepare for it with proper estate planning. And proper estate planning is needed, regardless of how big or small you think your estate is, because no matter what, your family is going to have to handle whatever you have when you’re gone.

Indeed, facing life’s greatest fear head-on and using it as an opportunity to protect and provide for your family is one of the greatest gifts you can give yourself and those you love.

If you’re ready to begin truly living your life, start by working with us to properly plan for the inevitability of death. Contact us today to get started by scheduling a Family Wealth Planning Session.

We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. Schedule online today.

In our uber-busy lives and DIY culture, it’s no surprise that this kind of thing might seem like a good deal. You know estate planning is important, and even though you may not be getting the highest quality plan, such documents can make you feel better for having checked this item off your life’s lengthy to-do list.

But this is one case in which SOMETHING is not better than nothing, and here’s why:

Creating a DIY will online can lead you to believe that you no longer have to worry about estate planning. You got it done, right?

Except that you didn’t. In fact, you thought you “got it done” because you went online, printed a form, and had it notarized, but you didn’t bother to investigate what would actually happen with that document in place in the event of your incapacity or when you die.

In the end, what seemed like a bargain could end up costing your family more money and heartache than if you’d never gotten around to doing anything at all.

Creating a DIY will can lead you to believe that you no longer have to worry about estate planning. In the back of your mind, you might even promise that one day you’ll revisit and update your plan with something better, but chances are, having done “something” will lead you to put this off until it’s too late.

By doing nothing, on the other hand, at least you won’t be lulled into a false sense of security, and estate planning will still be at the top of your life’s to-do list, as it should be until you handle it properly.

Unfortunately, because many people don’t understand that estate planning entails much more than just filling out legal documents, they end up making serious mistakes with DIY plans. Worst of all, these mistakes are only discovered when you become incapacitated or die, and it’s too late. The people left to deal with your mistakes are often the very ones you were trying to do right by.

The primary purpose of wills and other estate planning tools is to keep your family out of court and out of conflict in the event of your death or incapacity. With the growing popularity of DIY wills, tens of thousands of families (and millions more to come) have learned the hard way that trying to handle estate planning alone can not only fail to fulfill this purpose, it can make the court cases and conflicts far worse and more expensive.

From the specific state you live in and the wording of the document to the required formalities for how it must be signed and witnessed, there are numerous potential dangers involved with DIY wills and other estate planning documents. Estate planning is most definitely not a one-size-fits-all deal. Even if you think you have a simple situation, that’s almost never the case.

The following scenarios are just a few of the most common complications that can result from attempting to go it alone with a DIY will:

In many ways, DIY will planning is the worst choice you can make for the people you love because you think you’ve got it covered, when you most certainly do not.

We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. Schedule online today.

If you have pets, you probably want to make sure they are well-taken care of, if anything happens to you. Unfortunately, wishing for their good fortune isn’t enough. Too many animals are abandoned when their owners die and face rehoming, life in an animal shelter, or worse. Tip: create a pet trust.

To make sure your furry friend is taken care of when you become incapacitated or upon your death, you can leave assets for their care and custody. The best way to leave your faithful companion assets is to set up a pet trust.

On January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect, and it could have big implications for both your retirement and estate planning strategies—and not all of them are positive.

Last week, we discussed three of the SECURE Act’s most impactful provisions. Specifically, we looked at the SECURE Act’s new requirements for the distribution of assets from inherited retirement accounts to your beneficiaries following your death.

Under the new law, your heirs could end up paying far more in income taxes than necessary when they inherit the assets in your retirement account. Moreover, the assets your heirs inherit could also end up at risk from creditors, lawsuits, or divorce. And this is true even for retirement assets held in certain protective trusts designed to shield those assets from such threats and maximize tax savings.

Here, we’ll cover the SECURE Act’s impact on your financial planning for retirement, offering strategies for maximizing your retirement account’s potential for growth, while minimizing tax liabilities and other risks that could arise in light of the legislation’s legal changes.

If your retirement account assets are held in a traditional IRA, you received a tax deduction when you put funds into that account, and now the investments in that account grow tax free as long as they remain in the account. When you eventually withdraw funds from the account, you’ll pay income taxes on that money based on your tax rate at the time.

If you withdraw those funds during retirement, your tax rate will likely be quite low because you typically have much less income in your retirement years. The combination of the upfront tax deduction on your initial investment with the lower tax rate on your withdrawal is what makes traditional IRAs such an attractive option for retirement planning.

Thanks to the SECURE Act, these retirement vehicles now come with even more benefits. Previously, you were required to start taking distributions from retirement accounts at age 70 ½. But under the SECURE Act, you are not required to start taking distributions until you reach 72, giving you an additional year-and-a-half to grow your retirement savings tax free.

The SECURE Act also eliminated the age restriction on contributions to traditional IRAs. Under prior law, those who continued working could not contribute to a traditional IRA once they reached 70 ½. Now you can continue making contributions to your IRA for as long as you and/or your spouse are still working.

From a financial-planning perspective, you’ll want to consider the effect these new rules could have on the goal for your retirement account assets. For example, will you need the assets you’ve been accumulating in your retirement account for your own use during retirement, or do you plan to pass those assets to your heirs? From there, you’ll want to consider the potential income-tax consequences of each scenario.

Your retirement account assets are extremely valuable, and you’ll want to ensure those assets are well managed both for yourself and future generations, so you should discuss these issues with your financial advisor as soon as possible. If you don’t already have a financial advisor, we’ll be happy to recommend a few we trust most.

And if you meet with us for a Family Wealth Planning Session (or for a review of your existing plan) to discuss your options from a legal perspective, we can integrate your financial advisor into our meeting. Together, we can look at the specific goals you’re trying to achieve and determine the best ways to use your retirement-account assets to benefit yourself and your heirs.

Here are some things we would consider with you and your financial advisor:

In light of the SECURE Act’s changes, you may want to consider converting your traditional IRA to a ROTH IRA. ROTH IRAs come with a potentially large tax bill up front, when you initially transition the account, but all  earnings and future distributions from the account are tax free.

While the SECURE Act has significantly altered the tax implications for retirement planning and estate planning, as you can see, there are still plenty of tax-saving options available for managing your retirement account assets. But these options are only available if you plan for them.

If you don’t revise your plan to accommodate the SECURE Act’s new requirements, your family will pay the maximum amount of income taxes and lose valuable opportunities for asset-protection and wealth-creation as well. To make sure this doesn’t happen, schedule a Family Wealth Planning Session or an existing estate plan review today.

We will work with you and your financial advisor to analyze all of the ways in which your retirement accounts are impacted by the SECURE Act and educate and empower you to choose the most suitable planning strategies for passing your assets to your loved ones in the most tax-advantaged and least risky manner possible. You’ve worked too hard for these assets to see them lost, squandered, or not pass to your heirs in the way you choose, so contact us right away.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.