Boston Estate Planning and Probate Lawyer & Attorney : Gosselin & Associates Law Firm : Serving Boston, Winchester, Hingham, Wellesley, Manchester

Reverse mortgages are not just for poor people anymore. I am tired of hearing about reverse mortgages - in the past six months it's as if someone flipped a switch to turn up the noise, not necessarily the quality, of the messaging to elders about reverse mortgages.  

In my practice as an estate planner in Massachusetts I am often called upon to "get creative" on behalf of clients. As one of only a few true legal experts in the reverse mortgage industry, my creativity often opens the discussion with clients about complex uses of reverse mortgages in estate planning.

 I have developed several methods to leverage the equity value of a client's house to enhance either the economic benefit or overall personal security of clients. To explain the concepts in shorthand, Gosselin Law claims a servicemark on the shorthand names of many of our approaches. Here are examples of somewhat magical things that can be done with reverse mortgages as an estate planning tool.

GOLDEN TRIANGLE(sm). The Golden Triangle demonstrates to elders looking to plan for long term care how to use the reverse mortgage as a tool for closing the five year gap provided under the new Medicaid laws. It is a triangle as there is an estate plan, a long term care plan and a reverse mortgage plan coming together to provide for both current and future long term care needs. Here's how it works:

Mary, a 77 year old widow in Boston, has lived in her own home for over 40 years. This is the house that sheltered her family, where her dear husband passed and where she intends to stay until the very end. Although Mary has a good pension from the Commonwealth of Massachusetts, Social Security and adequate short term savings,  Mary is concerned that if she needed long term medical care that she could not afford to remain in her home or pay for a nursing home. Mary also wants to provide as much for her family upon her death as possible; after all she and her husband both worked hard to be able to leave something for their three children.

Mary's good health and family history of longevity helps indicate that Mary will likely grow to be very old. Her home is valued at $450,000 in today's real estate market. Based on her age, current interest rates and the property's values, Mary's HECM line of credit will be about $280,000 at closing. Mary qualifies for long term care insurance, but she feels that the $5,000 annual premium, although vitally important to her ability to remain in her home, is too much to pay on her fixed income. As many elder law lawyer advised her to  transfer the house to avoid exposure to a Medicaid lien - but every technique available requires a 5 year waiting period before she would be elegible for Medicaid.  At 77, Mary could live 15, 20 years or even longer - so even with her fixed income and ongoing inflation, she will no longer be able to afford to stay in her home in the not so distant future.

By securing a HECM reverse mortgage line of credit or similar reverse mortgage product, Mary will enable herself to have access to both a current and ready pool of cash, but also an appreciating line of credit that will be available to her for the rest of her life. Using a $5,000 per year draw, Mary will be able to buy the "Cadillac" of long term care insurance (including extensive home care benefits and high benefit limits) which will also serve to exempt her house from Medicaid liens immediately, without waiting for five years. At the same time, Mary's estate planning will have time to season. After five years, Mary will have had the peace of mind in the form of long term care insurance, lifetime financial security, and in her ever increasing available HECM cash and a now permanent estate plan to carry out her wishes. A Golden Triangle, indeed.

An interesting variation on the reverse mortgage that could work well in the Golden Triangle is the "Retirement Mortgage" from Virgin Money. Essentially a child acts as the reverse mortgage lender, documents the transaction as a loan to ensure that he or she is repaid before any other siblings at the time of the elder's death. I am a big proponent of Virgin Money (full disclosure is that I am working with Virgin Money in developing new and exciting products for the US market), on the principle that families should be helping each other first before turning to often high cost products from the financial services community. 

SNOWBIRD(sm). In the Snowbird(sm) we show reverse mortgage companies how to prospect with sunbelt real estate agents to facilitate the purchase of properties with reverse mortgages, primary residences can be obtained with a reverse mortgage purchase money mortgage, and secondary residence by using a reverse mortgage leveraged primary residence in Massachusetts as collateral for the real estate purchase. Similarly, we show elder homeowners how to conserve cash by using reverse mortgages as purchase money mortgages. Here's an example:

Bob and Cathy, 70 and 68 respectively, haved lived in their lovely 4 bedroom home in Newton for over 30 years. Now retired, Bob and Cathy enjoy playing golf, sailing and visiting with their two children and their families (who both live in the Greater Boston area). As much as they enjoy the New England seasons, they enjoy spending the Winter and long weekends in Florida. They have made many new friends and enjoy the Florida lifestyle, especially in the Clearwater Beach area.

Financially, Bob and Cathy have not fared too well. Bob worked for Polaroid for over 30 years, but because of its collapse, his pension benefits and stock savings (all in Polaroid stock) are meager at best. Bob continues to work part time at The Country Club in Brookline, which also gets him some free time on the greens. Cathy never worked outside the home, but has been doing quite well organizing Ebay sales for her friends and neighbors looking to downsize their homes. The thought of doing this at this point in her life brings Cathy to tears, but she and Bob agree that they would enjoy having a place in Florida during their healthy retirement years.

Based on Bob and Cathy's ages, current interest rates and the $800,000 value of their Newton home, they could borrow approximately $425,000 in reverse mortgage cash. They could draw it all at the closing or take some in a lump sum and leave rest to be available for future withdrawals. Bob and Cathy would very much like to purchase a $200,000 condominium in Clearwater Beach condominiums, not far from their favorite public golf course.

By taking out a reverse mortgage as above, Bob and Cathy will have the best of all worlds. They will have the cash they need to buy the Florida condominium outright (and enjoy its appreciation throughout their retirement), a financial cushion in the form of the remaining credit line on their Newton home, and most importantly, will be able to keep and enjoy their home. Of course, interest will acrrue on their borrowings, but between the expected appreciation of the Florida property and the value they place on the two-home lifestyle, Bob and Cathy will have it all in retirement thanks to the Snowbird.

ROBINHOOD(sm). The Robinhood(sm) guides more sophisticated and larger property value elders on the use of asset leverage by using other financial products, especially second to die life insurance. In simple terms, the reverse mortgage is used to pay premiums and the actuarial analysis results in a positive arbitrage for the reverse mortgage borrower. Here's a simple example to ilustrate the idea:

Mike and Sheila enjoy financial security by anyone's measure. Mike, recently turned 65, and Sheila, 66, just sold their successful software company to a larger competitor - realizing over $10 million in restricted stock in the buyer from the sale. Adding that to their $2 million primary residence in Brookline, $3 million Nantucket home and $5 million in other savings, mainly in qualified retirement plans, Mike and Sheila will pass a large estate on to their five children. Or, will they only fill the coffers of the US Treasury? Based on a $20 million estate, Mike and Sheila's estate planning attorney showed them a potential estate tax of over $6 million if they were to die this year.

If we were their attorneys, we would suggest setting up an irrevocable life insurance trust (ILIT) to hold a survivorship (second to die) life insurance policy. As wealthy as they may seem, Mike and Sheila lack sufficient liquidity to commit to a relatively large insurance premium, although the arbitrage on the numbers clearly show the economic benefit of establishing such an estate plan while they are young and healthy. The solution? A reverse mortgage, either on a line of credit basis where premiums are paid annually or a lump sum cash account where Mike and Sheila can purchase their life insurance (through the ILIT) with a single premium.

By using the reverse mortgage to pay the life insurance premium, Mike and Sheila will get the liquidity they need without running afoul of income tax rules or using restricted or otherwise inaccessible assets to pay for the needed life insurance. Upon the second of Mike and Sheila's death, the overall estate will be liquidated and the reverse mortgage paid in full with part of the cash proceeds of the life insurance policy, the balance to be used for paying estate taxes or direct bequests to their family. Based on a sophisticated side-by-side analysis of their reverse mortgage projections and life insurance guarantees, Mike and Sheila can make an educated arbitrage decision without significant risk of economic loss.

We are not licensed to provide insurance or loan products and any decision to proceed with any of these advanced reverse mortgage plans requires you to work with your trusted advisors. But, Gosselin Law can help our clients evaluate various complex uses of insurance and mortgage tools, as well as suggest reliable sales organizations

Gosselin Law is one of the only elder law firms in the country with a reverse mortgage specialty practice. We can assist homeowners in the states where we are licensed or associated with local counsel with the planning of reverse mortgages, coordination of federal benefits with reverse mortgage loan proceeds and gerneral asset protection and estate planning.

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The earliest landowners probably demarcated their property by saying, "I own my cave and 100 steps in every direction from its entrance." Over time, as the number of humans increased, the law had to evolve in order to regulate more complex ownership interests. Any form of regulation requires balancing rights and duties. And when "a house is divided," i.e., when several people share ownership of the same piece of property, it becomes especially important to explicitly define each party's rights and delineate each party's duties.

 In legal terms, there are three ways in which co-ownership (known as concurrent ownership) is structured: The parties can be (1) joint tenants, (2) tenants by the entirety or, (3) tenants in common. It is important to note that concurrent ownership is a concept that only applies to present possessory interests in the same property. For example, if the same piece of property is given in a will to several people, they will not be considered concurrent owners.

Joint Tenancy: Traditionally, joint tenants must receive their interest at the same time and through the same document, like a will or a deed. Survivors is the other important characteristic of joint tenancy. Survivors means that when one of the joint tenants dies, their interest automatically passses to the other joint tenant. The heirs of the deceased joint tenant or those named in her will do not have the right to inherit the property. In order to create this type of ownership, the party or parties seeking to create it must use specific language demonstrating that intent.

For example, if Grandpa Adam wishes to give his apartment to grandsons Cain and Abel for them to share as joint tenants with right of survivorship, the legal document giving the apartment to Cain and Abel must specifically say something like:" to Cain and Abel, as joint tenants". Each joint tenant's interest must be equal in amount. Building on the example above, Cain and Abel each must have an equal, undivided one-half interest. And like a tenancy-in-common (discussed later) each joint tenant has the same the rights of ownership, i.e., each can use, occupy and possess the property at the same time. A joint tenancy can continue indefinitely unless one of the tenants does something to sever it. Certain actions (like partition, discussed below) will break the joint tenancy and automatically make the co-owners tenants-in-common.

Tenancy-by-the-Entirety: A tenancy-by-the-entirety is a form of co-ownership that applies only to husbands and wives while they are married. It is based on the archaic common law view that husband and wife are only one person for the purpose of owning property. As long as they are still married, neither the husband nor the wife have a separate interest that can be sold, mortgaged, leased or liened against. The property cannot be divided or partitioned between them. In Massachusetts each spouse has an undivided interest in the whole property and the right to sole ownership when the other spouse dies.

Since a tenancy-by-the-entirety applies only to a husband and wife during a valid marriage, should they divorce, the ownership is automatically converted into a "tenancy-in-common" with each person owning a one-half interest in the property. At the outset, husbands and wives who do not want to be tenants- by- the-entirety, should make sure that any property they acquire while they are married is documented using language which clearly states that they do not own the property as tenants by the entirety.

Tenancy-in-Common: A tenancy-in-common generally applies to two or more persons who are not husband and wife, but own the property together. The owners may have unequal interests and may had receive their interests at different times and through different means or documents. A tenancy-in-common may be created in a written agreement or by default (as discussed above in the case of broken joint tenancies and severed tenancies by the entirety). The key difference between a tenancy-in-common and other types of co-ownership is survivorship. Upon death, a tenant-in-common's interest passes to her heirs or those named in her will. There is, therefore, no right of survivorship that transfers the decedent's interest in the property to the other co-owners. Each tenant-in-common can occupy and utilize every portion of the property at all times and in all circumstances and, each co-owner is also responsible for a proportionate share of the expenses, taxes and repairs incident to property ownership.

If the all of the expenses are paid by one co-owner, the other co-owners must reimburse her for their share of the costs. Or should they refuse to pay her, she may petition the court to levy a lien against their interests in the property. Co-owners have the right to sell their interest in the property, giving it away while they are alive or transferring it to persons of their choice at death, without the consent of the other co-owners, with the buyers or inheritors sharing the same rights and duties of ownership as the co-tenant who passed on her interest. If tenants-in-common wish to terminate their joint ownership of the property they may voluntarily do so by signing an agreement to partition or they may file a court action for partition in the Probate Court or Land Court.

Petitions to Partition: Property can only be partitioned if co-tenants share a present, undivided legal interest and they may either divide the property into parcels or, if the land cannot be fairly divided, the court may order that that the property be sold by private sale or public auction and their proceeds be apportioned by law equitably among the co-owners.

A property can be partitioned even if there is a lease on it, and someone living in a leased, partitioned property, must be permitted to continue living there. Merely instituting partition proceedings does not terminate a tenancy. Partition proceedings, like any other legal action, cost money. The court determines the reasonable expenses and charges of the proceedings. If the property is sold, these expenses and charges are paid out of the sale proceeds and in those cases where the property is divided, the petitioner (the person asking for the partition) pays the expenses and charges with contribution from the other parties in proportion to their respective interests, unless the court finds that a different ratio would be more equitable.

Conclusion: Even the most primitive conceptions of ownership probably recognized the importance of specificallydefining the rights and duties of each co-owner when more than one person owns the same piece of property. The earliest assertions of concurrent ownership probably went something like, "We both own this cave. I have a right to live here and you do too. You have to clean it and I will clean it too."

Today, because more and more people are co-owning property, "dividing the house" has become an even more complex task for which professionals are needed. Seniors who like to co-own property or who'd like to get their money out of a piece of property that they own with others, should contact a lawyer and/or a real estate professional. Lawyers can be instrumental in drafting the appropriate legal documents that define co-ownership, and in the event of a voluntary or court-ordered partition, lawyers can draft the requisite partition agreements or can represent petitioners in probate or land court proceedings. When "a house is divided" someone should be there to make sure that it doesn't fall as the pieces are being put together or when they are being taken apart.

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