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A reverse mortgage can allow you to tap into your home equity 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.
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. How much money you might be eligible to receive from a reverse mortgage is based on the equity that 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 to 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.
A co-borrower on a reverse mortgage doesn’t have to be the other borrower’s spouse, but they must be at least 62 years old when the mortgage is issued.
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 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. Also, in terms of avoiding estate taxes, it’s worth noting that federal estate taxes in 2022 only kick in when estates are valued at more than $12.06 million. In 2023, the amount is more than $12.92 million.
Because irrevocable trusts are less common, the terms “living trust” and “revocable trust” are often used interchangeably.
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.
If you give your home to someone before you die, then they may have to use your cost basis in the home when they eventually sell it, rather than the stepped-up basis for which they would be eligible by inheriting it. This could result in a tax bill (or a bigger tax bill) for them.
Bear in mind that if the person whom you wish to see inherit the home (such as your spouse or a co-borrower) is already on the deed, then 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 have a home that’s in a living trust, you can apply for an HECM on that home. If you have a home with an 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 an HECM, such as being at least 62 years old. 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.
Setting up a living trust can run you anywhere from $1,200 to $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—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.
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.
According to the American Bar Association, the average estate takes six to nine months to complete the probate process.
If you have a home with a reverse mortgage, you can put it into a living trust. 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; however, many people may find a living trust to be an unnecessary expense.
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