Buy parents' house outright or private reverse mortgage?

[Anonymous]

Parents need additional money for retirement. We have the ability to buy their home outright, but wonder if it makes more sense to structure it as a private reverse mortgage.

It seems like the pros of the reverse mortgage are that we can continue to invest and earn interest on the money and give it to parents as needed, while still getting an equity interest in their house in return rather than structuring it as a gift. That way, we can exceed gift tax limits in the amount we give them a year if necessary. Also, there are some concerns about parents' money management, so giving them the amount over a longer period of time has some appeal. The cons would be the expense/time to set up the reverse mortgage, and that it would accrue interest that parents' would need to pay. My question is, can we forgive the interest on an annual basis? I know this would be considered a gift, but I assume the accrued interest would be below the gift tax exclusion since there are two couples involved (and the house is worth less than $500k total).

The pros of buying the home outright are that it would be simpler and parents wouldn't owe interest, but the cons are, we would have a substantial amount of money invested in an asset that likely won't appreciate much.

We would also consider structuring this as a life estate, but think it's likely that parents may need to move into assisted living before the end of their lives so I think that likely doesn't make sense. We could also consider transferring ownership to an irrevocable trust on either option since parents will likely need Medicaid assistance one day (hopefully in 5+ years), but since their house is under $500k, is there actually any benefit to doing so?

Are there are other pros/cons/questions I should be considering?

[Anonymous]

If you structure it as a reverse mortgage, and in 7 years they need to move into medicaid assistance, what happens to the house? Does it go to you, or does it have to be sold to the highest bidder and the amount you've paid them so far is reimbursed to you as a first lein holder?

[Anonymous]

You could always buy it outright and have them pay you rent, in whatever agreed upon amount you decide (i.e. a reverse mortgage that pays you). If you have concerns about their money management, then look into setting up a POA.

[Anonymous]

DP here:
Also thinking about doing this with my mother + step-father's beach house. However that is going to be probably worth $1.4M and they still owe $600K on the property at 3% interest.

We don't have cash for that kind of transaction and we'd love to assume that mortgage. Was wondering about the best way to structure it.

[Anonymous]

Anonymous wrote:You could always buy it outright and have them pay you rent, in whatever agreed upon amount you decide (i.e. a reverse mortgage that pays you). If you have concerns about their money management, then look into setting up a POA.

I think these are called sale-leaseback agreements and can work well within a family. There are existing templates and guidance on how to make these work. It would probably be worth it to work with an attorney specializing in eldercare issues to optimize and address any potential pitfalls.

[Anonymous]

Just help your parents without taking their house.

[Anonymous]

Anonymous wrote:Just help your parents without taking their house.

OP here - if we do this as a pure gift, without getting equity in the house (either through outright sale or reverse mortgage), we would exceed gift tax limits, so this way we can actually assist parents more. Also, parents are proud and don't want to ask for help, so structuring it this way makes it more palatable to them. And, there are other siblings who don't have the finances to help parents in the same way, so this helps with equity of eventual inheritance, which has been discussed and agreed to by all siblings as being the most fair (i.e., each sibling will eventually get a proportion of inheritance based in part on what they put in over these remaining years).

[Anonymous]

I’m a real estate attorney. Private reverse mortgage seems to meet everyone’s needs best. I would consider whether you should intentionally not waive the interest so that if they end up in government support the amount of interest would not be lost.

Consult your own attorney for specifics.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Just help your parents without taking their house.

OP here - if we do this as a pure gift, without getting equity in the house (either through outright sale or reverse mortgage), we would exceed gift tax limits, so this way we can actually assist parents more. Also, parents are proud and don't want to ask for help, so structuring it this way makes it more palatable to them. And, there are other siblings who don't have the finances to help parents in the same way, so this helps with equity of eventual inheritance, which has been discussed and agreed to by all siblings as being the most fair (i.e., each sibling will eventually get a proportion of inheritance based in part on what they put in over these remaining years).

You can each gift them separately so that’s $40k a year. Or, pay directly the bills.

[Anonymous]

What about buying the house from them with no down payment and letting them hold the note? You can set your own interest rate and that way you can get them monthly money without worrying about them blowing through it and you’ll also get ownership of the home.