Have Your Parents Planned?

As an adult, you’re fortunate if you still have your parents. However, as they get older, you may well have to assist them in some key areas of their life. Specifically, they may need you to get involved in some of their financial issues. And if you do, you may need to focus on three areas: leaving a legacy, providing for long term care, and managing finances during retirement.

While initiating these conversations may not be easy for you, it is important, and you may find your parents more willing to discuss these issues than you had thought. In any case, if your parents haven’t already done so, encourage them to work with an estate-planning professional to develop the necessary legal documents, which may include wills, trusts and financial durable powers of attorney. These documents and services can be invaluable in helping individuals find efficient ways to pass assets from one generation to the next. An estate-planning attorney can identify which arrangements are the most appropriate for you and your family.

In your discussions on leaving a legacy, you may also want to bring up the topic of the beneficiary designations that may appear on your parents’ life insurance contracts and qualified plans, such as 401(k)s and IRAs. If the family picture has changed in recent years, and your parents had intended to change these designations, they should take action sooner rather than later.

While your parents need to deal with the legacy issue, they still may have plenty of years of living ahead of them — and they might need help managing their money during these years. For starters, you may want to have a discussion about their savings, investments, insurance and so on, and where these assets are held. Are they kept in banks or investment companies? Do your parents have safe-deposit boxes? This knowledge could be valuable if you ever become involved in managing or distributing your parents’ resources.

Also, you might want to talk to your parents about the income sources they may be drawing from during their retirement. For example, how much are they taking out each year from their 401(k)s and IRAs? They don’t want to withdraw so much that they deplete their accounts too soon, but at the same time, they would no doubt like to maintain their standard of living in retirement. You may want to suggest to your parents that they evaluate their investment portfolio for both growth and income potential — because they will need both elements during a long retirement.

It is worth giving some thought to the idea of long term care.  If your parents to not have long term care insurance, you should talk with them about exploring the possibility.  If that avenue is not available, a qualified elder law attorney can often help a family find other ways to pay for long term care (in-home care, assisted living, or nursing home).  Much of this sort of elder law planning is done at a "crisis point" when the need for long term care is imminent or has already arrived.  If you take the time to help your parents plan for long term care before they need it, you will be able to plan more economically and more efficiently.   

If your parents aren’t already working with a financial advisor, you may want to encourage them to do so. Managing an investment portfolio during retirement is no easier than doing so during one’s working years — and there’s less time to overcome mistakes. A qualified financial advisor can help your parents choose the right mix of investments that can help meet their needs.

During your lifetime, your parents have done a lot for you. You can help pay them back by doing whatever you can to assist them in managing their financial, estate planning, and elder law needs.

Look Before You Leap: Reverse Mortgage Foreclosures on the Rise

Reverse mortgage loans have become very popular in recent years as a way for seniors to convert home equity into cash.  But the number of reverse mortgages in default has risen steeply and many of those elderly homeonwers are faced with the prospect of foreclosure and even evictions in some cases.

The percentage of reverse mortgages in default s is relatively small at 6%, but it has risen dramatically in the past two years.  With a reverse mortgage, borrowers are not required to make monthly mortgage payments, but are required to maintain payments for their property taxes and homeowners insurance.  A failure to make these payments is a default under the terms of the reverse mortgage and can lead to a foreclosure and ultimately eviction.

More than 90 percent of reverse mortgages are insured by the Federal Housing Administration's (FHA) Home Equity Conversion Mortgage (HECM) program.  The program began in 1989 and there have been approximately 660,000 loans made under the program with about half a million still outstanding.  About three quarters of the loans have been made in the last five years as the program has become popular.  In a 2006 survey by AARP of seniors who went through the required HECM counseling and then decided not to take out a reverse mortgage, the most often cited reason for not going forward with the loan was high costs associate with the loan.

Mortgage Meltdown Drives Rising Costs

Before the mortgage meltdown led to problems at Fannie Mae, the quasi government agency purchased nearly all HECM loans. During that time, Fannie Mae set the interest rates and required that all loans have adjustable rates.  When the mortgage market collapsed Fannie Mae allowed interest rates to float leading to higher interest rates.  As Fannie Mae struggled with financial problems, in 2010, it pulled completely out of the HECM market and announced that it would no longer purchase such mortgages.

After Fannie Mae's departure from the market, Ginnie Mae stepped in and became the primary means for funding HECM loans.  The majority of Ginnie Mae loans have been fixed rate loans in which the borrower is required to withdraw the full loan limit at closing. The number of fixed rate loans is now upwards of 70 percent of all HECMs.  Traditionally, HECMs were used by borrowers as a supplement to their social security or other retirement income where they would withdraw a small amount each month to supplement what they received from other sources.  The full withdrawal loans are more expensive for seniors who don't need the full withdrawal because interest rates are higher and interest runs on the full amount of the loan from the day of closing.  These loans do however typically have lower or no upfront origination fees and often no ongoing servicing fees.

The HECM "Saver", introduced in October 2010, essentially eliminates the upfront Mortgage Insurance Premium of 2% of the home value in exchange for loan limits that are 10 to 18 percent lower than standard HECM loans.  The Saver can be less expensive for those who need relatively small loans, but interest rates are .25 to .5 percent higher than standard HECM loans and origination and other fees may be higher as well.  FHA is hoping that premiums generated from these low risk loans will offset anticipated losses on other types of reverse mortgages.

Is a Reverse Mortgage a Good Idea for Me?

Unfortunately as is often the case with a complicated subject, I have to say, that depends.  Whether a reverse mortgage is a good idea for you depends on the specific circumstances of your situation.  It can be a lifeline that will enable you to maintain your independence.  The fact is that as a result of the decline in home values and the mortgage meltdown, the costs of these loans has increased and the choices have become more complex.

Before you decide to commit to a reverse mortgage, it would be a good idea to sit down with your team of advisors, your tax advisor, your financial advisor and your elder law attorney to consider what other options there are to help you maintain your independence.