Wake Up Parents!!! The Kids Don’t Want your House!

It was an ongoing conversation between a mom and adult daughter and me (in the middle).  Moving slowly to what I call the “legacy awareness,” stage where we begin to explore mom’s legacy, a loving daughter’s inheritance expectations (or lack of) and possible living benefits (my carefully-chosen words for gifting valuables) for both.

The dialogue flowed innocent enough, until one simple, direct question left my lips:

             “Carol, if mom dies what would you do with the house?”

I do these things on purpose. It got real quiet. Then.

Carol: “Well, I don’t want that!”

Mom:  “It’s a great house; it was our house, mine and your father’s. You lived there too didn’t you like it?”

Carol: “Of course, but I have my own place, and all that ____,” I mean stuff.” But the word had slipped out. The “J” word.

Junk? That’s not junk. It’s my entire life!!

Most likely that 3,000 square-foot albatross with shingles is not an heirloom in the eyes of your kids. In fact, they would prefer you deal with the house and its contents as soon as possible – while you’re alive and well enough to handle daunting tasks that come with downsizing into a more humble abode.

Deep attachment to a house is understandable – plenty of wonderful moments were created within those walls; most likely you’ve accumulated plenty of items through the decades and haven’t parted with much in a very long time.

Parents are still storing their parent’s stuff too. There’s multigenerational hoarding going on everywhere. And I don’t see many families doing much about it.

Frankly, many retirees would rather stay put; moving is stressful. I don’t care how old you are. It’s less trouble to remain in a place that’s outgrown you and choose to live in “the house within the house,” which usually is reduced to two rooms and a bath.

Your kids are busy with their kids, careers, and still coping with the financial distress that comes with a mediocre economic recovery. A majority of households are dealing with too much debt, skyrocketing college costs, underemployment, and now this? Do the kids want an inheritance? Sure. Do they want the house? No.

Currently, retirees are ravaged by the Federal Reserve’s steadfast decision to transform safe money into dead money by cementing short-term interest rates at zero and artificially suppressing intermediate-term yields.  The result is a dismal level of income generated (after inflation/taxes many yields are negative) and little hope for a respectable income from high-quality bond investments.

“Retirees” have resorted to re-entering the work force (if 55 or older, it appears you’re working more years than originally anticipated, too) and remaining vigilant about cutting household expenses. But how much cost cutting can you do before you need to hit the big stuff?

Thank goodness for Social Security otherwise most of us would be sunk. A select few are still eligible for defined benefit (pension) plans; the number of workers lucky enough to know what pensions are continues to decrease markedly since the early 1980’s.

A primary residence may represent an asset with cash-flow potential. And don’t feel guilty: The kids prefer you consider your needs first.

Kids: The key to motivating parents to take action begins with you.

1). Spark a Dialogue. Granted – sounds obvious enough. In practice though, not easy. Conversations about legacies, estate plans, inheritances are difficult. Don’t be afraid to enlist a “fire starter,” like your financial advisor if he or she is objective enough and possesses a semblance of EQ or emotional intelligence. Empathy and respect are important here.

Families just don’t talk enough (or at all), about inheritance matters until forced to or a life event triggers it. It’s time for this conversation to begin. If only so the parents are aware of your preferences.

2). Outright downsizing may be an answer. Why continue to remain in the smaller “house within the house,” situation?

So, sell the big house. Let it go. Based on recent reports, it appears to be an opportune time. Use the cash to purchase a smaller place in full (no mortgage if possible). Release the shackles of the material goods you haven’t dusted in years and get them to a consignment shop. Better yet, open the door to gifting cherished items to the children while you’re still alive.

Think seriously about renting. Why not? Yes, rental rates have increased in several markets so you should examine the tradeoff between buying and selling on a case-by-case basis.

Gain a grasp on annual home price changes vs. annual percentage of rent increases or decreases would be important. From there, one of the best calculators on the internet is available for free from the New York Times at http://www.nytimes.com/interactive/business/buy-rent-calculator.html.

3). Consider a Home Equity Conversion Mortgage Saver. I understand the concerns about the closing costs and fees that go along with reverse mortgages, but hear me out.

Data released by the National Reverse Mortgage Lenders Association (NRMLA) shows senior home equity increased by $30 billion in the fourth quarter of 2011. Seniors have $3.22 trillion in home equity available according to the most recent NRMLA/Risk Span Reverse Mortgage Market Index (RMMI) report. That’s unlocked potential you can’t ignore if tapped strategically. Remember, you must be 62 years old to consider any reverse mortgage option.

Although you’re limited by the amount you can borrow, the HECM Saver is more cost effective than a standard reverse mortgage option. The HECM Saver has an upfront premium (cost) of .01 percent of your property’s value compared to two percent for a standard reverse mortgage. Also, those who utilize the HECM Saver are limited to borrow roughly 10 to 18 percent less than for the Standard reverse mortgage.

Instead of withdrawing in the form of a lump-sum cash payout, it’s best to retain a line of credit that can be used only when necessary. Work with a knowledgeable financial adviser who can assist you with establishing clear rules to trigger and monitor credit line usage. The decision should be based on a thorough examination of cash-flow needs, your overall portfolio mix and current market conditions.  The goal is to have a readily available source of funds to draw from when warranted.

The debt associated with a reverse mortgage (or HECM Saver) must be paid in full when the borrower dies, moves out permanently, or elects to pay it off voluntarily. Any equity remaining belongs to the borrower or the borrower’s estate. If the debt exceeds the property value, the FHA (Federal Housing Association) bears the loss, not the borrower or the borrower’s estate.

One of my favorite websites designed to educate mortgage and reverse mortgage borrowers is The Mortgage Professor, www.mtgprofessor.com  operated by Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. You can access, free of charge, a series of articles about reverse mortgages including Using a HECM to Strengthen Retirement Plans.

Use the recent, positive news about housing to get the thought process rolling.

It’s ok parents, really – the kids don’t need your house.  Have faith that the memories within will always be worth a small fortune to them no matter what.

And that is exactly what the kids want.

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