Know when not to borrow against your parent’s house
When crisis strikes and your parent is hospitalized, there is no easy way to tell how long the triggering event will last and often you do not know when or even whether a mother or father will return home. Sometimes recovery is long and painfully slow.
If this uncertainty is combined with lack of knowledge of your parent’s resources, as often happens, one tempting thought could be to borrow against their home to pay for medical bills not covered by Medicare or other insurance. If you should have this thought in the future, hesitate and gather information before making the decision. It is even more complicated than it originally seems and there may be other alternatives. It is important to know when not to borrow against the house to pay for care.
As an elder law attorney, I sometimes wondered how these situations occur. The most extreme example I witnessed was one where a mother, having been released after extensive recuperation, found that she no longer had a home after her daughter had taken out a reverse mortgage on her house. A standard reverse mortgage, although it does not require payments while you are in the house, goes into default if you live outside the home, even if for medical reasons, for a period of a year or more. There may be equity remaining which would be released but the entire process can be disconcerting to say the least.
While borrowing against the house is useful sometimes, it needs to be considered in light of other circumstances. Here is what would happen in an ideal world.
In an ideal world, a parent would take a trusted child into her or his confidence and explain what assets she has and what debt, including mortgage debt, is outstanding. Parents would avoid ongoing credit card debt.
They would set up, preferably in a separate account, a readily accessible fund that could be used for unexpected medical expenses. If they had long-term care insurance, they would have remembered and planned for co-pays and elimination periods. If they did not have long-term care insurance, they would put more aside.
Parents would give the trusted child a carefully drafted financial power of attorney and a health care power of attorney.
There would be no mortgages outstanding on an elderly person’s home and, if there is a reverse mortgage, he or she is healthy and plans on staying in the home indefinitely. This is recognizing that we do not live in this world and sometimes parents do not have the funds.
In the real world, parents may fail to share their financial information with their children. They may assume that they will never get sick or, if they do, it will be taken care of somehow. Often they do not have a financial or health care power of attorney. Records are rarely in one place and, if they are, the children do not know where that place is.
Credit card debt and mortgages, once almost unknown to many seniors, are more common now.
After Medicare runs out in time of crisis and children begin receiving bills for nursing home care for $10,000 a month or assisted living for about half that amount, they may panic and seek advice. Borrowing against the house is seen as an easier way out. Here are issues to keep in mind.
First, explore other resources including bank or investment accounts. Check thoroughly before necessarily considering a home equity loan or a reverse mortgage on the house.
Second, if a parent is very low in assets and is in a Medicaid-certified nursing facility after rehabilitation, it may be possible for her to receive temporary Medicaid that will allow for her to return home. This is an option that should be explored.
Finally, for children who have the funds themselves, especially if the costs are temporary and the house is going to sell, one possibility is for the adult child to advance funds to the parent and take back a private mortgage on the parent’s residence. I have written about private reverse mortgages in the past. They are transactions in writing between the parent and a private party — often their adult child. Then, when the house sells, the child can be reimbursed.
All of these measures require expert advice but as to borrowing on the house for long-term care outside the house, the adage is an old one — look before you leap.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.