We deal with many clients and estates which provide for the specific distribution of real estate (such as a house) to a named beneficiary. This seemingly straightforward provision can result in family disputes and financial hardship when the real estate is subject to a mortgage. The question that always comes up is “who pays the mortgage”?
If you want the recipient of the real estate to own the property free of any debt, then the remaining trust assets will be used to satisfy any remaining mortgage balance at your death. This would reduce the amount distributed to the other trust beneficiaries.
On the other hand, you may want the recipient to take the real estate “subject to” the mortgage. This can create a difficult financial situation for the beneficiary who must choose among four options: (1) assuming the existing mortgage; (2) securing a new mortgage; (3) satisfying the mortgage with their own funds; or (4) selling the property to satisfy the proceeds.
If the recipient cannot afford to pay off the mortgage and qualify for a new mortgage (often due to lack of income), the real estate may have to be sold. If your goal is to provide a home for the recipient for the rest of their life, this may not be possible without requiring the trust to pay off any debt at the time of your death.
If your trust provides for a specific distribution of real estate subject to a mortgage, you should carefully consider the best approach to satisfy the mortgage following your death. Whichever approach you prefer, your trust should clearly reflect your wishes. If you are unsure how this issue is handled in your trust, please contact our office to schedule a review of your trust.
Parman & Easterday