08 Nov Should I plan to liquidate my IRA and get a reverse mortgage?

Q. I live with my 79-year-old sister, her daughter and granddaughter. She has a reverse mortgage on the house and I’m now old enough, at 64, for my own reverse mortgage. If my sister dies intestate, her daughter is too young to be eligible for her own reverse mortgage, whereas I could liquidate my IRA to pay off the reverse mortgage on the property. So, can the house be put into a trust in my name to avoid sibling estate taxes rather than a will, so I could qualify for another reverse mortgage without us having to sell the place?
— Sister

A. There’s a lot to consider here.

Before you do anything, you need to gather more information.

A reverse mortgage is a contract with the financial institution, therefore, it has terms and conditions regarding repayment upon transfer and upon death, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

So your first step is to have your sister speak to the mortgage company to determine details regarding repayment of her loan including the amount due together with any fees, she said.

If your sister died, the mortgage would be a debt of the estate, Romania said.

“Generally, upon death, heirs would be required to repay the lesser of the loan balance or 95% of the home’s appraised value,” she said.

A local realtor could provide you with an estimate of the value of the home. If your sister’s home passed to your sister’s daughter, there would be no inheritance tax and if it passed to you, only the net value would incur inheritance tax to the extent it exceeded $25,000, Romania said.

“Your plan to liquidate your IRA to obtain your own reverse mortgage likely does not consider the income tax you will incur when you liquidate your IRA and all of the fees that you will incur in obtaining your own reverse mortgage,” she said. “Both of these amounts could be substantial. Before making any decision, you need estimates of these taxes and fees.”

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This story was originally published on Nov. 8, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.