Adult children, along with other heirs, can make or break your overall retirement. Over the years, I have met with clients who dread discussing their finances with their adult children and do not ever involve them in their retirement plans. On a personal level, I certainly understand why parents do not want to include their children as they either do not want the children to worry, or they do not want the children to ultimately know the nitty-gritty details of their finances. However, this eventually becomes a family "issue" when the older parents can no longer care for themselves, or they can no longer manage their own finances, or worse, when they run into financial difficulties. Inevitably this will become your heir’s issue to deal with upon your passing anyway.
Therefore, I almost always recommend that we include the adult children, other family members that will ultimately become the Executor of the estate, or the beneficiaries in the overall Retirement Mortgage Planning discussions. These adult children and other family members can certainly help provide you the emotional support that is needed but also be another set of eyes and ears to ensure that the plan that we put together helps to achieve not just your short-term goals but also to achieve your long-term goals to include legacy planning.
When evaluating your goals and your legacy planning, home equity can and should be part of the overall conversation. However, it should not be viewed as an automatic “gift” to your heirs upon your passing. There are many reasons that you should consider utilizing some of your home equity during retirement and not actually leave it all behind for your heirs.
Home Equity can be a very powerful asset to tap into during retirement for many reasons. In general, home equity is one of the few assets that you are not required to pay income taxes on when you take the equity out of your home, like when utilizing a reverse mortgage*. This is again a unique advantage compared to other assets like a 401K, stocks, or a traditional IRA which are all taxable*. Additionally, home equity is typically referred to as an illiquid asset, meaning that you cannot access the money very easily. Most people believe that you cannot access your home equity unless you sell your home. However, a reverse mortgage allows you to access some of your home equity without having to sell your home, and still maintain ownership and occupancy of your home. Plus, you are not required to make a monthly mortgage payment of principal and interest when you access your equity with a reverse mortgage (you are still required to pay your property taxes, homeowner’s insurance and maintain your home). On top of all that, you can still pass your home onto your heirs when you are gone.
When we discuss your legacy goals, we also evaluate what your children’s needs and goals are as well. If you have more than 1 child, when you pass away, your heirs will likely sell your home (this is true 99% of the time) because they will likely not move into your home together when you are gone. Therefore, they will sell your house and pay off any mortgage that you have on your home, and they will inherit the remaining equity at that point in time. Plus, they will get a step up in tax basis as well which is another great tax benefit* that you get to pass onto your heirs when you age in place and utilize a reverse mortgage as well.
* This is not considered tax advice. You should consult a tax advisor for tax specific advice and guidance.
