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Do you want to leave someone your mortgage?

If you plan to leave a house, car, business, or other property to one of your heirs, and the property is subject to a mortgage or other debt, do you want o leave it with the debt? Or do you want the debt to be paid off from your other assets so the person receives the property debt free?

Surprisingly, many people don’t think about this question when they write their will.  But it can have a very big impact on how your assets are divvied up among your heirs.  In some cases where the heirs don’t get along, it can even lead to a lawsuit.

If you’ve taken out a second mortgage, a home equity line of credit, or a new business loan, that could affect your division of assets and you  might want to consider revising your will. 

Many people leave a specific item or items to one heir and the rest of their property to others as a way of evening out the bequests.  But if you do this and then some of your assets significantly increase or decrease in value, you might want to consider rewriting your estate plan, with particular attention to who gets assigned any debts. 

Supposed a man has two daughters, Jane and Sue.  He plans to leave his house to Jane and the rest of his property to Sue. When he dies, the house is worth $600,000 and he owes $200,000 on a home equity line of credit.   Obviously, it makes a huge difference whether Jane gets the house subject to the $200,000 debt, or whether the $200,000 has to be paid off out of Sue’s portion of the estate.  In the past, in many states the assumption was that if you left someone a specific piece of property, it was intended to be a complete gift – not subject to any debts.  Unless a will said otherwise, any debts attached to the property would be paid off from the assets that were left to other heirs.

But recently, many states have changed their laws so the presumption now is the property will pass to the heir with the debt attached – unless you specifically say otherwise.  Many older wills say the executor must pay “all debts” of the estate before distributing property.  But under the new laws, if a will says this, it applies only to unsecured debts – not secured debts such as a mortgage or business loan.

For this reason you might want to re-examine your will and carefully consider what should be done with any secured debts. While home mortgages and business loans are obvious examples, cars, boats, RVs and vacation property are also often subject to secured loans on which people make monthly payments.

An unclear will can lead to family disputes and even lawsuits.  This is particularly true after a second marriage, where bequests are made to a second spouse and to children of a first marriage, or to both natural children and stepchildren. 

In a case decided earlier this year, a Florida father left a sugar cane farm to one of his sons, and the rest of his property to another son.  At the time the father died, he owed $241,000 in loans on the farm.  The executor paid off this debt out of the second son’s inheritance.  The second son objected and went to court.  A judge agreed with the executor, but the Florida Court of Appeals later threw out that ruling and said the first son, not the second, had to pay off the loan.  Had the father thought more carefully about his estate plan at the time he took out the loan, he could have saved his family a lot of grief and expense.

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