Reverse Mortgages and Living Trusts

Here’s when it may make sense to have both

A reverse mortgage can allow you to tap into your home equity in order to save you from having to sell your home or move out of it. A living trust offers you more control than a will over what happens to your assets—including your home—after, or even before, you die. Sometimes it can make sense to combine the two.

Key Takeaways

  • You can have a reverse mortgage on your home and also have your home in a living trust.
  • A living trust can give you greater control over what happens to your home after you die.
  • A living trust may benefit your heirs by avoiding the sometimes lengthy and costly process of probate.
  • Living trusts cost money to create, and not everyone needs one.

How a Reverse Mortgage Works

A reverse mortgage is what its name implies: Instead of you paying a lender, the lender pays you. Those payments can be structured in a variety of ways, including a single lump sum, regular monthly income, or a line of credit that you can draw on as needed. You or your heirs will have to pay back the lender after you move out, sell the home, or die. The amount of money you might be eligible to receive from a reverse mortgage is based on the equity you have in your home, among other factors.

Under the rules for the most common type of reverse mortgage, a home equity conversion mortgage (HECM), you (and any co-borrower) must be at least 62 years old to qualify. If you have a spouse under age 62, they can be listed in the loan documents as an eligible non-borrowing spouse, which may allow them stay in the home if you die or move into a nursing home. If your co-borrower or eligible non-borrowing spouse is younger than you, their age will figure into the calculation. The older the youngest person on the mortgage is, the more money you will be able to borrow.

The reverse mortgage payments stop after you and any co-borrower die. While an eligible non-borrowing spouse can stay in the home if they meet all the requirements, they will not receive further payments.

If the heir to your home is someone other than a spouse, such as your children, they can’t keep the home unless they pay off the loan to buy it. Otherwise, their options are selling the home and paying the lender or signing over the deed to the lender.

A co-borrower on a reverse mortgage doesn’t have to be the other borrower’s spouse, but they must be at least 62 when the mortgage is issued.

How a Living Trust Works

A living trust is a type of trust that you create during your lifetime to manage whatever assets you decide to put into it. The trust is administered by a trustee, who can be you or someone you choose. If you name yourself as trustee, you can name a successor trustee to take over after you die or if you become incapacitated.

Living trusts can be either revocable or irrevocable. Revocable trusts give you more control, allowing you to change their terms whenever you wish. Irrevocable trusts generally can’t be changed, but they can shield your assets from estate taxes and make it easier for you to qualify for Medicaid benefits should you ever need them.

Irrevocable trusts are more complicated and costly to set up and maintain. And in terms of avoiding estate taxes, it’s worth noting that federal estate taxes in 2022 only kick in when estates are valued at $12,060,000 or more.

Because irrevocable trusts are less common, the terms “living trust” and “revocable trust” are often used interchangeably. 

Advantages of a Living Trust

Putting your home into a living trust, rather than simply passing it on to your heirs through your will, has several potential advantages. The major one is that assets in a trust avoid the probate process. This can allow your heirs to receive the home and deal with the reverse mortgage more quickly.

A trust can also allow you to pass your home on to your heirs before you die, such as if you move out permanently into a nursing facility. You may, however, be subject to gift taxes.A third potential advantage of a living trust is that it is generally more difficult to challenge than a will, in case your heirs disagree over how you chose to divide up your assets.

Bear in mind that if the person you wish to see inherit the home is already on the deed (such as your spouse or a co-borrower), the home will skip probate anyway. That’s also true if you have a transfer on death deed, in states where that’s allowed. 

If you give your home to someone before you die, they may have to use your cost basis in the home when they eventually sell it, rather than the stepped-up basis they’d be eligible for by inheriting it. This could result in a tax bill (or a bigger tax bill) for them.

Combining a Reverse Mortgage With a Living Trust

If you have a home that’s in a living trust, you can apply for a HECM on that home. If you have a home with a HECM, you can put that home into a living trust with the lender’s approval. Either way your home will receive the advantages of being in a living trust as described above.

The trust beneficiary, who could be you or your spouse, must meet the requirements for taking out a HECM, such as being at least 62. The trust can also have contingent beneficiaries, such as your children, who don’t have to meet those requirements. When the beneficiary dies, the contingent beneficiaries will inherit the assets in the trust, at which point the reverse mortgage becomes due and payable just as if it weren’t in a trust.

If you decide to dissolve the trust in the meantime, that won’t cause the reverse mortgage to become due as long as one or more of the original borrowers still lives in the home and retains title to it.

How Much Does a Living Trust Cost?

Setting up a living trust can run you anywhere between $1,200 and $2,000 if you hire a lawyer to do it, though that can vary from state to state and according to the complexity of your estate. If you are adventurous, you can try to set one up yourself, either by buying an instruction book or through online software, for much less. However, you should be very sure that you understand the process thoroughly, or you may not get a good result.

What Is a Transfer-on-Death Deed?

In states where it is legal, a transfer-on-death deed allows your home to pass to your heirs after your death without going through the probate process. In that way it can be used as an alternative to a living trust.

How Long Does Probate Take?

According to the American Bar Association, the average estate takes six to nine months to complete the probate process.

The Bottom Line

If you have a home with a reverse mortgage, you can put it into a living trust. And if your home is already in one, you can obtain a reverse mortgage on it if you’re otherwise eligible. Living trusts have certain advantages over wills in passing property to your heirs when you die. Many people, however, may find a living trust to be an unnecessary expense.

Article Sources

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  2. U.S. Department of Housing and Urban Development. "Home Equity Conversion Mortgages for Seniors."

  3. U.S. Department of Housing and Urban Development. "Home Equity Conversion Mortgage (HECM) Information Regarding Surviving Non-Borrowing Spouses."

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  13. U.S. Department of Housing and Urban Development. "4235.1 Rev-1, Chapter 4. Mortgage Credit Analysis." Pages 4-6.

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  15. American Bar Association. "Wills and Estates."