My wife and I are in our mid-seventies and concerned with how we will pay for care as we age. We do not have long term care insurance and likely could not qualify due to health reasons. We own our $700,000 home debt-free but have modest liquid assets. Can we use our home equity to pay for care without having to sell it or go into debt? We would like to stay in our home as long as possible.
As we age, the need for long-term care becomes a critical consideration for many families. For older adults who have not purchased long-term care insurance or do not have sufficient liquid assets to cover extensive care costs, their primary asset—the family home—often becomes a focal point for financial planning. Many individuals feel that their home is the one asset they’ll be able to leave to family members. However, most polls show that children don’t really want mom and dad’s home. Inheriting the home also means inheriting taxes, maintenance, insurance, and squabbles over division. Most homes are sold at a discount with the cash divided among heirs.
It makes sense then that the home should be an available resource for long term care expenses. Your wishes to stay in your home as you age and move from independence to dependence is also typical. Most people would prefer to “age in place.”
Let’s look at four less-traditional ways to use your home equity to pay for long-term care.
Reverse Mortgage
A reverse mortgage can provide a substantial sum of cash by converting equity in your home into funds without selling the property. This option allows owners to access the equity in their home while continuing to live there without worrying about monthly mortgage payments. The loan is repaid when the homeowners sell the house, move out, or pass away. If care can be assured in the home, the reverse mortgage can either provide an upfront payment from which caregiving expenses can be paid, or a monthly payment based on a fixed term.
As of January 2024, the maximum claim amount for a Home Equity Conversion Mortgage (HECM), the only type of reverse mortgage that the Federal Housing Administration (FHA) insures, is $1,149,825. However, the actual amount a borrower can receive is limited by the median home price in their area as well as by a maximum loan-to-value (LTV) of around 50-60%. Assuming $700,000 is representative of home prices in your area, and a maximum LTV of 60%, upwards of $420,000 could be received and used to pay for care in the home. Even if one spouse has to move to institutional care, the other can stay in the home without having to repay the loan.
Sale-Leaseback to an Adult Child
This strategy needs a few conditions to work, but if you have an adult child with significant income or assets who doesn’t mind becoming your landlord, this is a viable option. It would involve “selling” your home to your adult child for cash or a promissory note. In this arrangement, your child could make monthly note payments to you. If you were to pass away before the note is fully paid off, the remaining balance could be forgiven in your last will and testament, allowing that child to inherit the home debt-free.
Because you are now a tenant in your home, you must also pay market rent to avoid adverse tax consequences, but paying rent could defeat the purpose of using the note payments to pay for home care in the first place! To get around this, your child can “gift” the annual rent to the two of you (up to a maximum of $36,000 for 2024) allowing you to use all of the annual note payments for care in your home. Great care must taken to draft the terms of this arrangement as if the sale was to a non-family member. In other words, no sweetheart deals because it’s “family” so it’s important to use a qualified attorney who is familiar with these arrangements.
Life Estate with a Sale of Remainder Interest to family
This arrangement would accomplish two things: 1) it would allow you to continue living in your home for the rest of your lives, and 2) it would permit one or more of your children to purchase your home at a significant discount. The discount is possible because you are selling the future right to own it, and that future value is less than what it is if you sold it today.
For example, using the required IRS tables and rates for the month of this writing, the value of your retained life estate is roughly 50% of the value of your home or $350,000 – putting the value of the remainder interest also at $350,000. Therefore, you could sell the remainder interest in your home for $350,000 and use that cash for your caregiving expenses. Your family member(s) would be able to purchase the house – albeit the future ownership of it – for half of its current value.
Life Estate with a Gift of Remainder Interest for Caregiving
This is a twist on the method above. Since the overwhelming majority of care in the home is provided by a non-paid family caregiver, you might also consider gifting the remainder interest in your home to the family member most likely to provide care for you. Using the figures above, a gift of the remainder interest in your home is equivalent to a gift of $350,000 now, which covers a significant amount of care and assures the caregiving family member that they will be rewarded for their caregiving.
However, to prevent misunderstandings between you and the caregiver, or between the caregiver and other family members, you will want to have a separate caregiving agreement established with the person to whom you granted the remainder interest. The obligations and scope of care should be explicitly covered in the agreement and clearly linked with the remainder interest gift as “compensation” for the care provided.
The Medicaid Option
While this is not a method of using your home equity as a means to pay for care, it bears mentioning that Medicaid is the primary source of long term care payments in this country. There is also a prevailing myth that Medicaid requires you to destitute yourself from all assets, including your home, before you can qualify for Medicaid assistance, and that it will evict the healthy spouse from the home in order to sell it to pay for the expenses of the institutionalized spouse. Not so, but the details of this are for another post.
Suffice it to say that under current Medicaid excluded asset rules, it exempts up to $713,000 of home equity as a countable asset when determining Medicaid eligibility, which is just above where you are currently. Thus, you could spend your current liquid savings down below the $2,000 limit, and apply for Medicaid in advance to coincide with your depleted savings.
In summary, for those whose net worth is tied up in an illiquid personal residence, one of these strategies might help to free up that equity without selling or moving out of the cherished home.
However, each involves complex and sometimes irreversible decisions, so before pursuing any of them, the guidance of a professional team is critical and should include both legal and tax professionals.