Debt affects us all. Even sometimes when it’s at its least convenient.
We all want to leave behind some form of legacy to our heirs; and for the most part, that’s typically going to be physical property. But debt can carry over even in death. According to a 2016 report from Experian, 37 percent of consumers who were reported deceased carried an average total balance of $61,554 in outstanding debt—including mortgages. And it’s not always hard to see why. Medical bills add up just as rapidly as mortgage payments do. It’s been estimated that some 43 million Americans are burdened by some form of medical debt on their credit history. By comparison, the entire state of Utah only has less than 3.2 million residents. And at a time in which priorities tend to be rearranged, it’s easy to see the mortgage payments can sometimes fall through the cracks.
What if you have a home with a mortgage when you die? What happens to your property? And who legally owns it?
What Happens To Your Mortgage When You Die?
It’s natural to assume a loan will be cancelled upon the death of a borrower. But more often than not, heirs to real property often find that they wind up inheriting both financial debt in addition to a home. Financial debt they frequently can’t pay off on time.
While you may think by selecting a beneficiary who can afford regular mortgage payments your physical estate can be kept intact, it’s actually more common for an heir to either sell property or let a creditor foreclose upon it. Generally speaking, it’s rare that an heir will suffer any sort of credit loss as a result of your mortgage debt—more commonly, credit damage can be the result of a co-signed loan or a failure of married couples to divide their assets.
If the home is worth more than the debt you owe, the difference goes to any beneficiaries. While this can be subject to the decision of an executor or legal representative, it’s not necessarily a bad idea to sign a clause in your will authorizing its sale for the sake of convenience for a designated heir rather than allowing potential property disputes to arise.
What To Expect When Mortgaged Property Goes Through Probate
If you haven’t clearly allocated your property to beneficiaries in a will or living trust, there’s a very good chance the property will have to go through probate. And one rule of thumb to keep in mind is the larger the debt, the greater the likelihood of having your home sold during the process. The probate process itself can be both lengthy and costly, and one that has the potential to open up old wounds. While Utah follows the Uniform Probate Code (which tends to simplify probate), it still has the potential to be needlessly complicated. Avoiding probate altogether by drafting a revocable living trust can help you avoid the process, but still cost beneficiaries an unwarranted tax burden.
Whether or not you designate a beneficiary through a will or a living trust, the executor’s first priority will be seeing that your assets will be designated to any creditors—no matter how small the debt. And if there’s considerable mortgage, there’s always a strong possibility a lender can force a sale. Consider drafting a list of liabilities alongside your will, including:
- Outstanding bills
- Federal and state income taxes
- Home equity
- Lines of credit
- Loans against any life insurance policies or retirement accounts
- Personal loans
- Property taxes
Divide these liabilities into two categories: ones you anticipate will be active during probate and ones which won’t be as immediate. You might find that by allowing an executor to sell a particularly large policy or investment account immediately on your death, your beneficiaries can use the assets to help pay off your mortgage policies.
Facing The Inevitable
Asset distribution is never something to take lightly. And without due preparation and consideration, your heirs may find they’ll wind up with a lot less than they expected.
More importantly, you need to think of the memory you’ll be leaving behind for your loved ones.
Our legal team here at GaryBuysHouses can help you take care of all the particulars. Contact us here to speak with us at no cost to you. We’ll guide you through the steps and make the process simple.