Your Inheritance May Come with a Debt
Inheriting a Mortgage
You may have seen movies where someone inherits a house from a rich aunt they have never met. The movie director focuses on the wonderful surprise on the new owner’s face, but for some reason they don’t show the surprise look when the owner learns that the house comes with a very large mortgage. Perhaps there are no mortgages in movies; in life we all know they are very much real. You should know what to do if you inherit property with a mortgage or if you wish to give your mortgaged home to someone upon your death.
Dealing with Debts
When a person passes away, their debts do not suddenly disappear. There are several factors that determine what happens. Some of these factors include whether the debt was secured or unsecured and community property debt or separate property debt. The debts are also prioritized for payment based on their classification outlined in Texas Estates Code §355.102. Regardless of the debt type, it does not go away.
To best address what happens to the debt, it may be easier to step away and look at the overall process. When there is a will, the named executor will have specific duties to perform. Some of the duties include taking an inventory of all the assets; obtaining an appraisal of the value of the property; listing the creditors and claims; and notifying the creditors and beneficiaries. These steps are set forth in much more detail in Texas Estates Code §308.002, et seq., but are beyond the scope of this blog. If there is no will, however, then the court must appoint an administrator to perform these responsibilities. After all, someone must tie up the loose ends when a person passes away.
Which Property is Sold First?
Texas Estates Code §355.109 sets forth the order in which property will be sold to pay the debts.
The first item to go is the property not disposed of by the will. This can happen when the will fails to mention property in which the decedent has an ownership interest. For example, a poorly drafted will may dispose of personal tangible and intangible property but inadvertently fail to mention real property. In Texas, the court will only use the text between the four corners of the will to determine whether the decedent intended to omit property from the will. See San Antonio Area Foundation v. Lang, 35 S.W.3d 636, 639 (Tex.2000). The Texas Supreme Court in Gee v. Read, 606 S.W.2d 677, 680 (Tex.1980) articulated clearly that “The testator’s intent must be drawn from the will, not the will from the intent.”
The next item to go will be the personal property and real property in the residuary estate. You may recognize the residuary estate as the “everything else” provision in the will. For example, I give this and that to X and ‘everything else’ to Y. Using a residual clause in the will is a good way to avoid leaving out any property you meant to dispose of under your will.
The last categories of property to be sold to pay off the debts are specific bequests of personal property and specific devices of real property. Specific bequests would include: my size 10 brown Tony Lama ostrich boots to my nephew Johnny Michael Jones. Specific devices, which refers to real property, would include: my house located at 123 Main Street, Anytown, Anystate to my sister Mary Lynn Jones.
Say It in the Will
Instead of allowing the state of Texas to decide which items should be sold to pay off debts, you can state it in your will. Similarly, if the property has a debt attached, such as a car loan or home with a mortgage, you can state in your will whether the items pass to your beneficiaries with or without the debt.
If you choose to pass the property to your beneficiaries free of the debt, then you should state which items are to be sold to pay the debts attached to these specific items. If you do not want specific property sold to pay your debts, then you should specifically list the items in your will. This creates a specific bequest and places the item in the bottom category of items to be sold to pay your debts. If you do not choose which property will be sold to pay the debt, then the state of Texas will choose for you.
Property that serves as security for a debt, such as a house with a mortgage, could be a major burden for an heir. As we know, most houses are not purchased with cash, but with a 30-year mortgage. In Texas, when you inherit a house you also inherit the mortgage, unless the will states that other property in the estate should be used to pay the mortgage.
Protections for Homes
In the event you inherit both the house and the mortgage, you do have some protection from the mortgage holder. The Consumer Financial Protection Bureau (“CFPB”) issued a ruling in 2013 to clarify that when a borrower dies, the name of the borrower’s heir may be added to the mortgage without triggering the CFPB’s Ability-to-Repay rule. In other words, the lender can add the heir’s name to the mortgage without first determining the heir’s ability to repay the mortgage. This clarification ruling helps the person inheriting the property to obtain account information, pay off the loan or seek a loan modification.
Disclaim Your Inheritance
If you have inherited a house and you know you will not be able to afford the mortgage, or you just simply choose not to accept the house for any reason, then you are not required to accept it. The property cannot be forced upon you. However, you must take certain steps to disclaim your inheritance. Unfortunately, it is not as easy as pretending the will did not list you as the beneficiary.
File a Disclaimer
Texas Property Code §240.001, et seq, sets forth the steps you are required to take to disclaim your inheritance; however, you should consult with an attorney to assist you, so you do not inadvertently bar yourself from filing the required disclaimer. In order for your disclaimer to be valid, Texas Property Code §240.009 requires your disclaimer to be in writing; declare the disclaimer; describe the interest disclaimed; be signed by the person making the disclaimer; and be delivered to the personal representative or filed in the official public records of the county where the decedent was domiciled on the date of his/her death or owned real property.
Don’t Take Control
You should be careful not to take control over the property before filing the disclaimer because Texas Property Code §240.151 states that a disclaimer of interest in property is barred if the disclaimant takes possession or exercises control over the property.
If a distant, rich aunt or uncle leaves you a large house just like in the movies, just hope it does not come with a mortgage. But, if it does have a mortgage, know that there are rules to protect you as the new owner and give you the authority to work with the mortgage company. Remember, you always have the option of walking away from your inheritance if you take the proper steps. Contact the Law Office of Hugh Spires, Jr. at www.TexasWillsLawyer.com for questions and assistance with your will.