My Brother Is Loaning My Parents Money in a Reverse Mortgage. Should I Worry?

What is and isn't worth worrying about when a family member creates a reverse mortgage for another.

Question

Our elderly parents live in their own home, and hope to stay there as long as possible. However, due to some medical expenses, they're running through their savings faster than expected. Last I heard, they were going to take out a reverse mortgage. But now I hear that my wealthy brother is going to provide the mortgage. I basically trust my brother, though he's a bit full of himself. But the whole thing makes me uncomfortable. Is he going to profit at my parents' expense? Or at my expense, when the estate is all wrapped up? And will he be able to tell them what to do with the money he lends them?

Answer

Don't jump to conclusions before finding out more. An intrafamily reverse mortgage can be a great way to benefit everyone concerned, by keeping mortgage costs down, keeping interest money within the family, and providing flexibility to the borrowers.

True, your brother will be making a profit from the loan. How much of a profit depends on the interest rate that he and your parents agree on. But he may be able to make a reasonable profit and still offer better terms that your parents could get from a bank. And would you really rather see the interest payments go into the coffers of a bank?

It would be highly unusual for a reverse mortgage to restrict what the borrower can use the money for. So unless you find out otherwise—or your brother is a forceful enough personality to order your parents around regardless of the actual loan terms—this should be stricken from your list of concerns.

As for your other concerns, a lot depends on the terms of the reverse mortgage. Assuming you're on good terms with your family members, and might be named in your parents' estate, you should feel comfortable asking for more information about the arrangement. You might even—if you have the financial means—ask to pitch in and become a lender on the reverse mortgage yourself.

Another factor that might give you comfort is that such arrangements are complex enough to make it worth hiring an attorney or financial professional to help with. (For example, if the loan proceeds build up to a certain amount, they could qualify as “excess resources” and disqualify your parents from receiving Medicaid.) Those parties should take steps to protect your parents' financial and legal interests.

In some ways, your brother has as much if not more reason to worry about what happens upon your parents' death as you do—a badly handled intrafamily mortgage could lead to a situation where the loan repayments are not counted separately, but treated as the person's share of the estate, as if he had never made the loan at all. But a reverse mortgage is clearly something that needs to be considered in connection with the estate-planning implications, so again, if you feel that your parents or brother aren't taking these into account, it's time to speak up and/or join in on a session with a lawyer or other professional who’s experienced in handling these arrangements.

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