Connections for Success



Even You May Benefit from a Reverse Mortgage
Adam J. Pechin

You may associate reverse mortgages with homeowners who are struggling to pay medical bills or need cash for living expenses. But even higher net worth individuals can realize financial benefits from a reverse mortgage.

Equity to Cash

With a reverse mortgage, you can convert a portion of the equity in your home to cash, which is paid to you tax-free. You remain living in the home and retain title. However, you must repay your lender if you sell, or, if you remain in it until your death, your heirs are responsible for repayment.

Reverse mortgages are available for principal residences only and homeowners (for married couples, the younger spouse) must be 62 years or older to qualify. Note that the transaction involves interest and fees that could outweigh other benefits.

Estate and Tax Planning

If you already have adequate income, you may want to consider using a reverse mortgage for estate and tax planning. For example, you could reduce the value of your taxable estate by using reverse mortgage funds to make annual exclusion gifts to your children or grandchildren. Under the annual exclusion, you can give up to $14,000 per year per recipient free of gift taxes ($28,000 for couples) without using up any of your lifetime gift and estate tax exemption or generation-skipping transfer tax (GST) exemption.

Or, you could use the cash to fund college savings plans for your grandchildren. 529 plan contributions qualify for the annual exclusion, and you can make up to five years’ worth of annual exclusion gifts to a 529 plan in a single year by using future year exclusions.

These accounts can grow tax-deferred, and distributions used to pay qualified education expenses are income-tax-free. Note, however, that favorable state tax treatment or other benefits offered by your home state for investing in 529 college savings plans may be available only if you invest in the home state’s 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors considered in making an investment decision. Consult with your financial or tax advisor about how state-based benefits (including any limitations) and state tax consequences would apply to your specific circumstances. Also, consider the investment objectives, risks and charges, and expenses associated with municipal fund securities, including 529 plans, before investing. This and more information is available in the issuer’s official statement. Please ask the issuer for an official statement and read it carefully prior to investing.

Another strategy to consider is using the funds to buy a life insurance policy naming your heirs as beneficiaries. Real estate market volatility means that you’ll never know how much your home will be worth when you die. But if you purchase life insurance with reverse mortgage funds, you can exercise greater control over your estate and leave a guaranteed amount to your family. And if you hold the insurance in an irrevocable trust, you can keep the insurance proceeds out of your taxable estate.

Right for You?

A reverse mortgage is not right for all homeowners. Be sure to consider the risks and costs before applying for this type of loan.

For more information, contact Adam Pechin at [email protected], or call him at 312.670.7444. Visit to learn more about our Wealth Management Services.

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