Protection of Cash With Homestead Investment and Reverse Mortgage

Many senior citizens use reverse mortgages on their homestead to fund their retirement living expenses. One caller asked whether money received as periodic payments under a reverse mortgage is protected from judgment creditors after the money is deposited in to the debtor’s bank account.

The general rule is that money in a debtor’s financial accounts traceable to an exempt asset remains exempt in the account provided it is not commingled with non-exempt funds. Therefore, reverse mortgage proceeds on this caller’s homestead can be exempt in a bank account.

Several of my clients have figured out that they can protect large amounts of otherwise non-exempt money by using homestead reverse mortgages. If a client transfers non-exempt cash to purchase or pay the mortgage on a Florida homestead the money is exempt under the Constitution’s homestead clause, and the transfer of money to the homestead may not be reversed as a fraudulent conversion. After the money is invested in the Florida homestead the client  applies for  a reverse mortgage and withdraws funds as needed to pay living expenses. Some people have used this plan to protect from creditors large amounts of liquid assets.

There are disadvantages to relying on homestead protection with reverse mortgage income. The obvious are the costs of the reverse mortgage. A reverse mortgage deducts from home equity interest and fees payable to the lender. Second, most reverse mortgages limit liquidity. The reverse mortgage provides an income stream but there may be caps on amounts withdrawn during periods of time. Notwithstanding these considerations, buying a homestead for cash and then using the homestead equity to pay living expenses through a reverse mortgage can be an effective asset protection tool.

Be advised that this asset protection plan may not protect debtor’s who file bankruptcy because bankruptcy law does not protect fraudulent conversions of money in to a homestead property.