Medicaid Implications on Reverse Mortgages Are Not Very Clear…
Act of 2005
BY MICHAEL DAVID SCHULMAN
One major unknown factor concerning reverse mortgages is the impact that the Deficit Reduction Act of 2005 will have on them. Because one of the goals of the act is to reduce government spending on Medicaid, it legislates that Medicaid be denied to applicants with more than $500,000 in home equity. As a result, more and more older adults will be required to pay for their own health care. It is expected that the number of reverse mortgages will increase as a result.
The Deficit Reduction Act also requires the state be named as a remainder beneficiary in annuity contracts, presumably to permit states to recover their Medicaid costs. While the details, on a state-by-state basis, have yet to be worked out, it seems clear that many planning situations that would have been solved through the use of an annuity contract (whether issued by an insurance company or a so-called “private annuity”) will need to find an alternative income source. Despite looking like annuities, reverse mortgages are a form of borrowing, so the “remainder to the state” rule referred to above does not apply. Reverse mortgages likely will be used in many of these cases.
Another “not yet determined” aspect of the Deficit Reduction Act and reverse mortgages is who gets the money when the house is sold. Put differently, the lender is in a primary position on a reverse mortgage. However, Medicaid also can put a lien on an older adult’s residence as benefits are paid. What will happen if Medicaid insists on being first? Or, if a Medicaid lien is in effect when an adult wishes to take a reverse mortgage, will Medicaid take a subordinate position to the mortgage lender?
As with any financial product being marketed to older adults, CPAs must take care to protect the client from financial fraud. In general, it is inappropriate to purchase a reverse mortgage – or any investment product – from a “door-to-door” vendor.
Many of these products have extremely high fees, closing costs and interest rates that can trap the unwary homeowner.
Michael David Schulman, CPA/PFS, is the principal of Schulman CPA, Central Valley, N.Y. His e-mail address is firstname.lastname@example.org.
Posted on October 6, 2007, in Law, Politics and tagged home equity, home mortgage, medicaid implication on reverse mortgage, mortgage, mortgage pitfalls, research reverse mortgage, reverse mortgage, reverse mortgage pitfalls, Seniors. Bookmark the permalink. 5 Comments.