When a home with an outstanding mortgage is gifted as part of an estate plan, the debt does not just evaporate upon the death of the owner. Even so, family homes are often the primary asset available to the next generation, presenting challenges for both bequeathing and inheriting them. Here are some pointers from attorneys.
Careful Estate Planning for Homes
When making arrangements for the future ownership of a home, including the responsibility of paying off a mortgage, it’s first important to review how the home was purchased. Typically, for example, when a couple purchases a home together, the loan is cosigned. In the event one spouse predeceases the other: “The surviving spouse must continue making mortgage payments. A surviving spouse may also be responsible for paying back a mortgage taken out by the deceased spouse alone if the couple lives in a community property state….”
Setting aside the issue of co-signers or community property spouses, careful estate planning can allow for a home, along with its mortgage, to pass smoothly to a designated beneficiary:
A person can leave a house to a loved one after their death under the terms of a will or trust, or with the use of a transfer-on-death deed … .When the home transfers, a mortgage or loan secured by the home also transfers. The person who inherits the home must pay off the mortgage with other funds or sell the property and apply the proceeds to pay off the mortgage. In certain cases, they may be able to take over (or assume) the existing mortgage and have it transferred to them, with the beneficiary continuing to make the monthly mortgage payments. Additionally, some lenders might work with the new borrower to refinance the loan and change the terms.
It’s common for parents to leave a home jointly to all of their children. These multiple beneficiaries have the same basic options as a single beneficiary who inherits a home, with the added challenge that they must agree on how to proceed with keeping the home, paying the mortgage, or selling it and dividing the remaining proceeds:
Any option requires all beneficiaries to be on the same page. One or more beneficiaries can buy out the shares of the other beneficiaries, although higher home prices and mortgage rates could make it impractical for one or more beneficiaries to buy out the other beneficiaries. If a consensus cannot be reached, the court may order the sale of the property and a division of the proceeds.
Note that because property has ongoing upkeep expenses, including utilities and insurance, maintaining it while making arrangements to sell it, can turn out to be a real drain on the estate. As estate planning experts underscore: “The longer it takes to list and sell a property, the more it will cost the estate and the less money the legatees will receive.” Keep in mind too, that absent a carefully thought out and proactive estate plan, a home, like other property, will be subject to the state laws of intestacy to determine the heir. Meanwhile, the probate court will “appoint a personal representative to distribute the decedent’s money and property and settle their debts”:
Because the home is part of the unsettled probate estate, the mortgage on the home becomes part of the probate estate as well. The personal representative may use other money and property from the probate estate to make mortgage payments until the home is sold or transferred to the rightful heir. If the mortgage is not paid off during the probate process, the heir will take ownership of the home subject to the mortgage….
Proactive Estate Planning Is Best
In addition to engaging an attorney and proactively planning for the future of the family home and other important assets, it is important to designate a loved one, friend or professional to serve as the fiduciary who will carry out your estate plan. Be sure your designee understands your arrangements, and has the detailed information needed to attend to them. Depending on your circumstances and region, your fiduciary may be specifically referred to as an executor, trustee, or personal representative. Regardless of the details of your estate plan, the fiduciaries you appoint have a legal responsibility to carry out your affairs, in accordance with the intentions set forth in your plan–and the law. When representatives are designated, fiduciary bonds, alternatively referred to as estate bonds, can be required as a safeguard for the interests of the estate and beneficiaries. Learn more about estate bonds right here.
At Colonial, a leading national provider of all types of fiduciary bonds, the steps to obtaining estate bonds are easy: get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere—even the law office.
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