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Law Offices of Ronald W. Rutz
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February 8, 1999: Reverse Mortgage; Death Taxes

Q: Just exactly what is a reverse mortgage? The more I read, the more confused I become.

A: A regular loan arrangement is where money is borrowed and received up front in a lump sum. The promise to repay (promissory note) is backed up by a mortgage (in Colorado usually a deed of trust). If the borrower breaks his or her promise (such as not paying on time), the lender has the right to sell the real estate because that right was given by the mortgage.

Instead of receiving the money right away, the reverse mortgage ties up the equity in the real estate. Then as money is paid, it is automatically secured under the initial umbrella. Payments from the lender can either be made when requested by the borrower (like a secured line of credit) or it can be set up so that regular automatic payments (like an annuity) can be made.

The amounts received (and often interest on such sums) normally need not be paid back until either the real property is sold or upon the death of the borrower.

If the property is sold, the proceeds, after selling costs are deducted, is used to pay off the advanced sums plus the interest. If more money is generated from the sale of the property than is needed to pay off the debt, then the estate will keep the balance. If in the unlikely event not enough money is received, the estate would be responsible to pay the balance of the debt under the promissory note.

Remember the reverse mortgage is basically a loan and should be viewed as such in your evaluation of whether it is for you.

Q: Do you favor the death to "death taxes" campaign being pushed by some politicians and groups?

A: "Death taxes" are, for the most part, a voluntary tax. If a family faces the loss of part of their inheritance because of them, it just means that the deceased did not take the time to do some fairly basic and inexpensive planning. Almost everyone has the power to put to death "death taxes" for himself or herself without the politicians.

Since you asked, Congress could better spend its time and political energy looking into the devastating impact caused by withdrawals from retirement plans such as IRAs, Keough, etc. Many withdrawals from them are forced because of the need for living expenses and also are required after certain ages. People who saved for their retirement, as the government urged, now find that from 1/3 to 1/2 of what they had accumulated could be taken by income taxes upon withdrawal. Now that the Roth IRAs pointed the way, fixing this problem, in my opinion, would be much more meaningful to far more people then the so called "death to death tax" campaign.

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