As of Wednesday, November 27, 2013
Dear Mary: Soon I will receive an inheritance that is almost equal to the amount remaining on my mortgage. I am a widow, age 55, with no dependents. I have 25 years with the same employer and have been participating in the company’s 401k plan for the past 15 years. I plan to work until I am 65. Should I use the inheritance to pay off the mortgage or, as friends suggest, invest it in a variety of stocks and bonds and keep my mortgage because the interest is tax-deductible? — Eleanor D.
Dear Eleanor: You need to check with your tax professional because, as you know, I am not one. However, if I were you, I’d pay off that mortgage so fast the lender would get dizzy. Investing in your debt is always a wise decision because you cannot lose. Just keep in mind that your mortgage should be the last debt you pay off — after you have a healthy emergency fund and you have paid off all of your unsecured debts.
If you pay off your mortgage, you own your home. No matter what happens to the economy, your health or your job, you have no rent or mortgage payments.
As for the deductibility of mortgage interest, it is highly overrated.
Let’s say you pay $1,000 a year in mortgage interest and you are in the 28-percent tax bracket. By deducting that $1,000 from your taxable income, you realize a $280 reduction in the taxes you owe. Does that make sense to you to choose to pay $1,000 so you can get $280 back? If so, I have a better deal for you. You send me $1,000 every year and I promise to send back $500 every April 15, no questions asked!
Dear Mary: A friend suggested that we look into a plan called “life estate,” which would make sure that our home would go to our children, even in the event that we would have to go to a nursing home and our monies run out. We understand this plan would not permit the nursing home to take our home. Your thoughts? — Tom and Jackie
Dear Tom and Jackie: I am not an attorney, but I do have experience as a real estate broker. Generally, “life estate” is a term used to designate the way legal ownership or “title” is held on real property. To do this, you would deed your property to your children, who become the “remaindermen,” and you become the “life tenants.”
As the life tenants, you retain possession of the property, including full costs of maintaining the property. The life tenants cannot sell the property without the consent of the remaindermen. Further, your children would receive full ownership (fee simple) immediately upon the death of the last life tenant, without the property going through probate.
There are three advantages for you to convey your property now to a life estate:
You will have the legal right to remain in your home for the rest of your lives, without triggering a taxable event.
The property immediately passes to the remaindermen without the necessity of a probate upon your deaths.
Most states see a life estate as a limited interest, rather than a full asset, so you could more easily qualify for Medicaid assistance, if necessary.
I suggest that you meet with a qualified real estate attorney or escrow company if you wish to deed your property to a life estate.
Would you like to send a tip to Mary? You can email her at mary@everyday
cheapskate.com, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.