A reverse mortgage could keep Mom in her home

Dear Liz: My healthy and active 82-year-old mother is faced with having to sell her home this year because she’s running out of money. She has lived a very minimal lifestyle for many years as her savings dwindled, and her income is now basically Social Security. She owes $25,000 on a home worth more than $700,000 in a top school district. We don’t know if we are jumping the gun with this sale. I could move in with her and pay rent for a year or two, although that would mean a longer commute for me and would just put off the day she has to sell. There are things that must be done to the house for upkeep, and her being cash-poor puts her in a crunch. My brother will help pay for minor sprucing up depending on what the real estate agent says we need to do to make the house presentable, but if Mom remains in the home there are other things to be done. We are assuming that we should sell it and find an apartment for her to rent until she needs more assisted living at a later age. Are we right to take action now?

Answer: Your family needs to take action, but setting your mother up for not just one but possibly two future moves probably isn’t the best course. Moving is terribly disruptive, and AARP surveys show that the vast majority of older people prefer to “age in place” rather than leave their homes.

Investigate reverse mortgages as one option. With a reverse mortgage, your mom could pay off her small mortgage and tap the substantial equity in her home. She could get a lump sum, a stream of monthly checks or a line of credit that could allow her to fix her home and live more comfortably. She wouldn’t have to make payments or pay income taxes on this loan, and it wouldn’t have to be paid off until she dies or moves out.

Reverse mortgages can be expensive because of the fees involved, although a new version of the federal Home Equity Conversion Mortgage offers lower upfront fees, and some lenders will waive or reduce their fees. You’ll want to do plenty of research, and shop around to make sure you get the best deal. The AARP and U.S. Housing and Urban Development websites have a lot of information about reverse mortgages.

If your mom decides she’d rather sell, she should consider a move directly to a senior community that offers assisted living as an option. She will have the most choices if she’s healthy when she moves in. Although she may never need the assisted living option, many people start to need some kind of help with daily activities by the time they reach their mid-80s.

DIY wills and trusts can backfire

Dear Liz: I wanted to thank you for urging people not to be cheap when doing their estate planning. I am an estate planning and elder-law attorney in Los Angeles, and every do-it-yourself trust or will I’ve seen makes it compulsory to leave income and assets to the spouse. This is a huge mistake in many cases. That’s because such a transfer will disqualify the spouse from receiving government aid from Medicaid (which is called Medi-Cal in California). The result could literally mean hundreds of thousands of dollars are lost. This area of law is extremely complicated and only a knowledgeable elder-law and estate planning attorney should be advising people about it.

Answer: Medicaid planning is a controversial topic, since the federal program is designed to help the indigent, not those trying to preserve assets. That’s why the programs have look-back periods (typically five years, although it’s 30 months in California) to discourage people from transferring assets just to qualify.

But your point is well taken that estate planning and elder-law issues are too complicated for do-it-yourself solutions.

Dealing with parents’ financial crisis

Dear Liz: My retired parents are in a financial crisis. They got behind on their credit cards while they were trying to pay the mortgage on their home of 41 years. That home is now in a short sale. An attorney has advised them to file for bankruptcy to discharge the credit card debt and any debt that might remain after the short sale. After the sale of the home, I need to relocate them to my state so that I can further assist them, but I’m not sure if any landlord will rent to them given their terrible credit history, which will look even worse after the bankruptcy. Right now they make too much to qualify for subsidized senior housing. Any advice would be greatly appreciated.

Answer: You’ll probably have better luck with mom-and-pop landlords than with the corporate kind that run huge complexes. The mom-and-pop types tend to have more flexibility with potential renters who have tattered credit, particularly if those renters can make substantial deposits. If your parents don’t have much cash left over after bankruptcy — and they probably won’t — you may need to front them some money or consider letting them live with you while they save up.

You also should get a better idea of what caused their financial train wreck to see what you can do to help avoid further crises. If they’re suffering from diminished capacity, you may need to talk to an elder law attorney about taking over their finances for them. If they’re chronic overspenders, they may benefit from budgeting classes from a nonprofit credit counseling agency or community college. Even if the only bad decision they made was to continue borrowing against their home rather than paying it off, they could still benefit from some financial education and advice about how to live within their means. A session with a fee-only financial planner could help you all figure out what that will look like.

Asset transfer could delay Medicaid eligibility

Dear Liz: My mom has BP stock. Currently she is moving toward applying for Medicaid to pay for nursing home expenses, and I was advised to put the stock in my name. Now I am watching her stock (and savings) plummet. It’s gone from a $100,000 savings to about $40,000 currently. Do I take it out, or do you think it will come back and I should leave it alone?

Answer: You may want to cash out at least some of the stock to hire a good elder law attorney who can advise you about the Medicaid look-back rules.

These rules are designed to prevent what you seem to be doing, which is trying to hide assets from the government by transferring them away from the potential Medicaid recipient. Medicaid is the government-run healthcare program for the poor, and recipients are supposed to have exhausted their assets before they apply. Any transfers made within five years of applying for Medicaid will delay eligibility.

As for your original question, having more than 10% of one’s assets in a single stock is extremely unwise, and you shouldn’t have any money invested in stocks if you’re likely to need it within the next 10 years. After you’ve consulted with an elder law attorney you might also want to make appointments with a tax pro and a financial planner so your mom can better manage what she has left.

The documents you need, but probably don’t have

Dear Liz: Good news! I wrote to you recently about being unable to find my elderly father’s signed living trust. However, just by luck (or maybe it was prayers to St. Anthony), the original copy of the trust has turned up! So that’s one problem solved. Now I hope you’ll tell people how important it is to sure your parents have filled out durable powers of attorney for finances and for health care. We had a health care power of attorney for him, but my dad never filled out the other kind, which has made it extremely difficult to handle his finances now that he’s had a stroke and is in a nursing home. Our only option may be to get a court to appoint a conservator of his estate but it sounds like that would be complicated, costly, and probably take a long time.

Answer: Every adult who cares about his or her family should have durable powers of attorney for health care and for finances. As you’ve discovered, the lack of these documents can cause huge problems, forcing families to go to court to get authority to make decisions.

Many people assume incorrectly that their spouses can just take over. In reality, without a durable power of attorney a spouse may not have the legal authority to transactions involving real estate, investments and other assets, even if they’re jointly held. If the spouse is also incapacitated or dies first, getting anything done—down to paying the light bill—can become impossible.

Your father’s living trust may have language that allows the successor trustee (the person who would manage his assets after his death) to make decisions regarding the assets in case of your father’s incapacity. But he still needed a durable power of attorney for finances so that someone else had legal authority to make decisions about assets held outside the trust and to pay bills.