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Wealth Wise is Kiplinger’s advice column on navigating retirement-related dilemmas. Questions from real people, for real people. Got a question? See below for how to send it to us.
DEAR WEALTH WISE: We are both 61, still working, and earn $400k a year. We’ve accumulated substantial unsecured debt and want to pay it off using an equity loan from our primary home. However, because of our debt-to-income ratio, we can’t get approved for an equity loan from our credit union. We have a second home (the reason for our high debt ratio), which we bought with our single daughter and that serves as her primary home. My husband holds the power of attorney and manages his 90-year-old father’s finances and assisted living expenses.
Should we use money from his father’s account to pay the unsecured loans — improve our DTI — and then get an equity loan to pay back what we took from his father’s account? — Up to Our Ears
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Dear “Up to Our Ears”: It’s not a given that earning a high salary makes debt easy to manage. Even with a generous income, you may find yourself overwhelmed with monthly debt payments.
Here, we have a 61-year-old couple earning $400,000 who needs help managing their debt. A home equity loan is commonly a great consolidation tool for unsecured debts because it can offer a considerably lower interest rate.
But this couple has a high debt-to-income ratio (DTI). That means they may struggle to get approved for a home equity loan. And even if they do get approved, they may face a less favorable interest rate due to their borrower profile.
The couple wants to know if borrowing the money from the husband’s father’s account is a smart course of action. The husband has power of attorney and can easily access that money. But while theft is clearly the last thing on this couple’s mind, as they’ve expressly stated their intent would be to repay every dollar, this approach raises a few red flags.
“If his father is on Medicaid or might apply within five years, the transfer creates a ‘look-back’ problem that can disqualify him from benefits….” — Jonathan Codispoti
It’s a very slippery slope
When a person gets power of attorney over another person’s finances, it’s often because they’ve become incapacitated due to illness, injury, or dementia. As such, they’re not in a place to make clear-headed, informed financial decisions.
The person holding power of attorney is often a relative and a trusted person by nature. But here, borrowing a lump sum of money may breach that trust.
“The power of attorney from an elderly father to his son only allows the son to act for his father’s benefit, and it also includes a fiduciary duty that the agent, the son, owes to his father,” explains Asher Rubinstein, estate planning attorney and partner at Gallet Dreyer & Berkey.
“Using the elderly father’s money to pay off the son’s loans is a definite breach of the fiduciary duty, as it only benefits the son and depletes the father’s assets. It may also cross the line of criminality.”
Kerri Koen, estate planning attorney at Modern Legacy Law Group, agrees.
“Whenever your strategy depends on ‘we’ll pay it back later,’ you can be sure there are legal and ethical red flags,” she says. “Using an elderly parent’s funds under a power of attorney to solve your own debt problem, even temporarily, is almost always a breach of fiduciary duty that will create legal exposure for you and risk to your parent’s care, not to mention the possibility of significant family conflict.”
Jonathan Codispoti, Founder at Legacy Wealth Strategies, says the repercussions of taking an unauthorized loan could be significant.
“I understand the logic,” he says. “You see a pool of money, you have every intention of paying it back, and nobody technically gets hurt. But the law, the ethics, and the practical risks all point in the same direction.”
Codispoti also says that in this situation, the collateral damage could be enormous.
“Your husband could face criminal charges, civil suits from other heirs, and an Adult Protective Services investigation triggered by his father’s assisted living facility, which is a mandated reporter,” he explains. “If his father is on Medicaid or might apply within five years, the transfer creates a ‘look-back‘ problem that can disqualify him from benefits and leave your family personally responsible for care that easily runs $8,000 to $12,000 a month.”
Additionally, Codispoti points out that if you were to move forward with your plan and apply for a home equity loan, you may be asked to document the source of the funds used to pay off your debts.
“Misrepresenting that on a loan application is itself fraud,” he says.
An authorized loan may be a different story
It’s clearly illegal to borrow from a parent’s funds without their consent. But an authorized loan may be acceptable, provided the father is capable of making that determination.
“If they are borrowing from the father and he has the capacity to agree to this, then that would be a better approach,” says Koen.
Rubinstein agrees, but with a strong caveat.
“Is the 90-year-old father capable of gifting to his debtor son himself, or giving the son written, notarized permission to use the power as anticipated? If not, then it would be over-reaching for the son to use the power in the way he is considering,” he insists.
However, Rubinstein cautions, “Even if the father makes a gift to the son, if the father is frail, someone — another potential beneficiary — could try to argue that the son over-reached and unduly influenced the father to make the gift.”
You have other options for addressing your debt problem
Since using the father’s funds in any capacity is potentially problematic, a safer move may be to address your debt on your own. The good news, says Codispoti, is that you may have more options than you think.
“Shop the loan,” he says. “Credit unions are often conservative on DTI. A mortgage broker can place you with banks or non-bank lenders that underwrite high-income borrowers with elevated DTI from a second property more flexibly. Cash-out refinances and non-QM HELOCs are worth asking about.”
Codispoti also suggests addressing the root cause of your issue.
“The second home is driving your DTI,” he says. “Hard as the conversation may be, explore whether your daughter can refinance it into her own name, whether you can restructure ownership, or whether selling is the right call.”
Take the ethical route
You may technically be able to get a loan from your husband’s father without crossing a legal line. Whether that’s the right thing to do is very questionable.
“Your father-in-law is 90,” Codispoti says. “The money in his account exists to ensure his dignity, comfort, and safety in the final chapter of his life…. Diverting it, even briefly, puts his welfare at risk to solve a problem he didn’t create.”
A word from Wealth Wise
We know that many Gen X readers, like this couple, struggle to provide support to their adult children and aging parents, all while planning their own retirement. In many cases, something’s got to give. As our article explains, selling the second home that the daughter lives in might just be the best long-term option.
Moreover, an unspoken (or perhaps unconscious) implication of the reader’s question is that the father, at 90, won’t be around much longer. That would free up his assets and make paying back the loan moot. That’s a dangerous assumption, given that the Social Security Administration’s Life Expectancy Calculator estimates that someone born in 1936 will likely live another four years and that more Americans are living to 100.
So, play it safe: Live with the resources you have now and know that your inheritance will be a welcome windfall someday.
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our writers and experts, in this advice column, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial adviser regarding any questions you may have in relation to the matters discussed in this article.