If your home or the home of your elderly parent’s home has been placed in a life estate, the laws regarding reverse mortgages and life estates have changed. Reverse mortgages are now permitted on property that is held in life estates. This could add to the quality of life for you or your elderly parent, as equity in the home can be used to supplement income, pay bills, or do needed repairs to the home that would otherwise not be affordable.
A life estate is a form of interest in a property that allows the homeowner, usually an elderly person, to retain full interest in the property until their death but the title is owned by another person, usually a family member. This is most commonly used when an elderly parent wishes to transfer ownership of their home to their child before the parent passes, but wishes to continue to live in the home.
There are certain conditions that apply:
- The subject property is not located in the state of Texas;
- The holders of the life estate, known as a life tenant and always the borrower and anyone 18 years and older with the future or remainder interest in the subject property, known as a remaindermen (NOT the borrower) signs following closing documents:
- Security instrument (1st and 2nd Deeds of Trust or Mortgage),
- Any applicable riders (e.g., Condo Rider) and
- Notice of Right to Cancel.
Life estates can be useful means of passing ownership of a family home to children or other heirs without having the home pass through probate. The home continues to be considered an asset of the original owner’s estate for estate tax purposes, and beneficiaries who inherit the property do so at the date of death (DOD) value, not the value of the home when it was originally purchased. This is known as a “step-up" in basis of the value of the property.
Note that because a life estate is considered an asset, the value of the home is still included by Medicaid as part of the homeowner’s assets.
If you have questions about life estates or how a reverse mortgage might help your family’s situation, please call the office at 516-307-1236.