1) Prepare a memo to the managing tax partner of your CPA firm in the format illustrated in the examples I have posted. Be careful to correctly cite court cases, statutes, regulations, revenue rulings, and all other materials that you use as shown in those examples and as described in chapter 2 of the text. You are to research this question thoroughly because your firm has determined that a number of clients may fall into this situation, and your memo is quite important. The starting point is the Crane case.
¶ … Wilma has inherited a house from her uncle who passed away recently. The uncle had taken out a reverse mortgage on this property, it appears he was paid money each month until his death and this amounted to a total of $210,000 including accrued interest, accumulated to increase the balance of the mortgage. On her uncle's death, the balance became due in full, immediately.
To establish the proper treatment inheritance of the property by Wilma from her uncle Bob, we must establish the financial ramifications by examining three options.
She can reject the inheritance of the house and allow the bank to foreclose on it. This will however be a constructive sale to the bank, which, after foreclosure, will lead to the loan being cancelled, and that this debt cancellation will cause that amount to be deemed an amount realized, producing taxable gain.
She can offer to settle the loan with the bank at the home's fmv, $90,000, and then staying in the home, herself. She will in this case offer them cash in that amount in order to get the loan discharged. We have to establish the amount of the gains that can arise from this option.
She can sell the house to a willing buyer then negotiate with the bank to settle the mortgage for only $80,000, which, after selling the house for $90,000 and paying 7% realtors fees and closing costs, will net her $3,700. Here also we need to establish the amount of the gain she might have to report in this case.
Analysis
A close examination of this case reveals that the second option is most appropriate. This mortgage most likely contain "Due on Sale" clauses, which states that the lender can call the mortgage due upon transfer of property. However, federal law (12 USC § 1701j-3(d)) provides some exceptions such as a transfer to a relative resulting from the death of a borrower. However this does not touch on the reverse mortgage. Therefore settling the loan with the bank at the home's fmv, $90,000 will be her best option. The argument here is that the reverse mortgage repayment is more important than the mortgage. Here then she will not have a debt to repay.
In Brown, 2010 WL 1903771, Ms. Brown inherited a family home with a reverse mortgage upon her mother's death. The amount, $29,524.44 was payable in full upon death. The court allowed Ms. Brown to file for Chapter 13 bankruptcy; she proposed to pay off the reverse mortgage in full as part of her five-year Chapter 13 repayment plan to Financial Freedom Senior Funding. This is a revelation of how critical debt inheritance is, it is much safer for Wilma to pay the debt and stay debt free. It is expected according to the U.S. federal law that the borrower or the heirs must repay the reverse mortgage. If in any case someone buys the home, and the sales price exceeds the reverse mortgage balance, the borrower or the heirs keep any amount that remain. On the other hand, if the cost of the house is less than the reverse mortgage, then the heir suffers the loss.
Conclusion
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