Case #4: Helping trustees with estate distributions
A seldom known use for a Reverse Mortgage Refinance that can be a great solution for specific trust situations where your client is a trustee involved in the process of distributing assets from a trust. Following is a scenario seen multiple times:
While prospecting or through networking you get to know a senior that as part of her estate owns a home she wants to pass on equally to her kids as she stated in her trust. She's done a good job of setting up, updating and making sure all her assets are put into the trust.
Sadly one day you learn that at age 85 she has passed away. A few weeks after the funeral you get a call from the one of three surviving children, her oldest daughter, who explains she is the trustee for her mothers estate and wants to meet with you to talk about her mothers house.
You learn that the daughter, age 62, moved into the house a year before her mother died to act as a caregiver and to land on her feet after a nasty divorce. She and the second oldest child, her sister, would love to have her stay in the home. However her youngest sibling, her brother, wants to take his one-third interest in the home and use it as a down payment to upgrade his own home and move to a better neighborhood across town. While he understands his oldest sister's situation and wishes, he's pushing her as the trustee to sell the house so he can get his money. All three are amiable and would love to find a way to make everyone happy.
You believe the value of the home is $610k and you ask and learn that the second oldest daughter is 59 and the brother is 52 years old.
Solution:
You share with your contact that a Reverse Mortgage Refinance could help her and her brother reach their goals by first evaluating the following steps and then if it makes sense to all parties involved retain the services of an attorney to put together the transaction and create any legal documents necessary to insure everyone's interests are protected:
- Determine from a Reverse Mortgage professional how this might work. In this case, the sisters and brother would have to agree to put title to the home in the oldest sister's name and from the Reverse Mortgage Refinance buy the brother out and pay off the one third interest he has in the property. An attorney would have to determine the best way to accomplish this - likely involving quit claims from the sister and brother after dissolution of the trust. This enables the oldest sister (the trustee) to qualify for a reverse mortgage on the home since she meets the minimum age requirements - age 62 (the others aren't old enough).
- Based on the trustee's age and a $610k home value, she would qualify for a $313,683 line of credit. However, the most she can access due to Reverse Mortgage FHA guidelines in the first twelve months is $185,827. The amount she needs to buy out her brother is $203,333 ($610k divided by 3). At first glance it appears the brother will get most but not all of his ownership percentage from the Reverse Mortgage Refinance up front and has to wait a year for the balance of $17,506. However, if the trust and supporting documentation support the intent to divide the estate evenly, than a Reverse Mortgage underwriter may likely consider the entire $203,333 to be a mandatory obligation and enable this amount to be available to pay the brother off at close.
- With this solution the brother is now bought out of the inherited home and has $203k along with proceeds from the sale of his current home as a significant down payment in a better area. In knowing about this application of a Reverse Mortgage, and introducing this as a possible solution as a value added resource, you are well positioned for the brother's listing and agent for the subsequent purchase of his new home. Your initial contact (the trustee) will get what she wants which is to stay in mom's home and keep it in the family. It is vital that the younger sister is involved in the process, understands how the Reverse Refinance works and supports both the brother and the older sister - hence the relationship amongst the three must be amiable. While the trustee owns the home, legal documents including possibly a new trust that protects the interests of the younger sister must be included in the overall agreement. Hence a qualified attorney needs to be involved from the beginning to insure the final outcome serves all three siblings fairly and is consistent with the duties of the oldest sister as the trustee of the estate.