March is perhaps best known for the college sports frenzy known as March Madness (the NCAA basketball tournament). However, every year March also features another kind of “rebound.” The spring real estate selling season begins as winter doldrums come to an end. Combined with the general upward trend of real estate pricing, increasing numbers of homeowners should be peeking their heads above water in the coming months. This new found equity may be useful to your estate plan. Remember in most of these transactions, your real estate will be taken out of your trust and you will be responsible for retitling it back in the name of the trust. For that reason, if you have already done any of these, verify with your attorney right away that your trust is properly funded!
Depending on your needs, it may be worthwhile to obtain a home equity loan or line of credit to pay certain types of expenses. Home equity loans used to make substantial repairs to your home increase the basis in your home and, typically, the value. Additionally, the interest on the loan up to $1.1 million is deductible on your income tax return. If you use the loan to pay for temporary medical expenses, tuition, or some other personal expense, you may still deduct the interest on up to $100,000 of principal. Home equity loans must be paid back as a regular mortgage, but can provide a relatively low interest means of getting money.
As a general rule, home equity debt is typically “recourse” debt, which means that the owner of the home is personally liable for the payments. Conversely, original purchase money loans (your original mortgage) is usually “non-recourse.” The bank may foreclose on the property if the mortgage payments are not made, but cannot hold the foreclosed-upon homeowner liable for any shortfall. If the entire mortgage is refinanced, then the owner is personally liable and the entire amount of the loan becomes “recourse” debt. If you intend to refinance in order to take advantage of lower interest rates, obtain home equity funds, or both, it is wise to speak to your attorney about the implications of doing so.
A reverse mortgage may be more beneficial for long-term needs. A reverse mortgage generally does not need to be paid back until your death and is secured by the value of your home. Generally, it is non-recourse as well. You must generally be at least 62 in order to qualify and you may only obtain a reverse mortgage on your personal residence. However, it can be a useful method of obtaining a consistent, monthly income.
Medi-Cal or VA Benefits
Additionally, if you have substantial equity in your home, planning for Medi-Cal or VA Aid & Attendance Non-Service Connected Disability is important to maintain your ability to qualify for benefits, while preserving tax benefits. By properly planning, you can preserve the step-up in basis your property receives upon your death. You may also be able to insulate your estate from Medi-Cal recovery.
For many people, home equity is one of their largest assets. Managing this asset is as important as managing any other parts of your estate plan! Whenever you change the liability associated with your home, you should always verify that your home remains properly titled in your trust.