What reverse mortgage means for inheritance

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Q. My parents are using a reverse mortgage to generate funds for daily living. Recently, someone suggested that they should have created a revocable trust for the home — which is quite valuable — so that it could pass to me and my brother more easily. Is it too late to that, now that the reverse mortgage is in place?
— Daughter

A. Here are some ideas for you.

If the home is already subject to a mortgage, whether a reverse mortgage or a traditional mortgage, the mortgage document will have a clause requiring the lender to be repaid upon transfer of the property, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

“Although the property remains in the taxable estate of your parents after being transferred into a revocable trust, it has still been subject to a transfer,” she said. “For that reason it is best to obtain the mortgagee’s consent before transferring property subject to a reverse mortgage into a revocable trust.”

Romania said notwithstanding that the mortgagee may consent to a transfer of the property into a revocable trust, it should then be considered whether it is cost effective or otherwise beneficial.

That’s because probate in New Jersey is not an unduly burdensome or expensive process, Romania said. Moreover, merely placing the real property into the revocable trust may not avoid probate.

“Probate will be necessary in any event if any assets pass under the will,” she said. “In other words, probate will be avoided only if everything is owned jointly, with beneficiary designations or is going to be placed in the revocable trust so that nothing passes under the will.”

Romania said one advantage to putting real estate in a revocable trust is avoiding the New Jersey tax waiver requirement upon death.

Even with the repeal of the New Jersey estate tax in 2018, New Jersey requires a tax waiver for New Jersey assets — real estate located in New Jersey; bank, brokerage or financial accounts; stock incorporated in the State of New Jersey — belonging to a New Jersey decedent, she said.

But property held in a revocable trust is exempt from the New Jersey waiver requirement.

“Avoiding probate and the waiver requirement must be weighed against the cost of preparing the revocable trust, transferring the property into the trust and administering the trust during your parents’ lifetimes,” she said.

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