Does Reverse Mortgage Affect Medicaid Benefits and Life Estate?

Scenario:

My grandparents are taking out a reverse mortgage from a bank which has offered to provide funds on a monthly basis. The agreement is such that after they pass away, the bank would sell the property and take away the proceeds leaving behind anything that’s extra to their children. Is it ok? My grandparents are nearly 70 years old and have health problems too. They have also applied for Medicaid. They have a life estate on their property with my brother. Can there be any problem with the Medicaid and life estate if they take out reverse mortgage?


Solution:

Yes, your grandparents can take a reverse mortgage and after they pass away, the bank can sell off the property and recover what they have invested. A reverse mortgage is such that any senior applying for it can get the loan funds in the form of monthly installments which they don’t need to pay off on a monthly basis. The loan needs to be paid back only at the end of the loan term.

However, if your grandparents intend to move out or sell property, or if they need to go to a care home/nursing home prior to the end of the loan term, then they do have to pay off the loan in full. And in case they pass away, your brother who’s on the life estate needs to pay back the loan if he intends to occupy the property with his name on the title. Otherwise, the lender will sell off the property in order to recover the proceeds and any extra cash from the proceeds will pass on to the heir, that is, your brother in this case, if there’s no one else on the life estate

However, prior to taking out a reverse mortgage, your grandparents need to understand whether it’s in their best interest to go for such a loan. I hope there’s enough equity in the home or else getting a reverse loan will not be easier.

Now, if your grandparents get qualified for a reverse mortgage, it may not affect their eligibility for Medicaid. The Medicaid benefits will not be considered as income as long as your grandparents spend the funds within the same month they’re provided. However, if it’s a reverse annuity mortgage, then the funds can be considered as income whether or not they are used up on the same month when they are offered. This is in accordance with the Deficit Reduction Act, 2005 under which the states looking forward to reduce their spending on Medicaid usually restrict anyone having more than $500, 000 in home equity from getting the benefits. Check out the state laws on Medicaid from an Elder Law Attorney in your grandparents’ state of residence.

As far as the life estate is concerned, it won’t be affected as long as your grandparents have the rights to keep the property as collateral for the mortgage.