We regularly get families of the deceased come into our offices wondering if they have to pay off Mom or Dad’s mortgage or car loan. The answer is not always so simple. It is going to depend upon whether the home will need to be probated, if there are other assets that need to be probated, the amount of other debts and if the balance due on the loan is more than the value of the home or car. Generally in most instances, if the family wants to keep the home or car, they will have to pay off the loans.
Most home and car loans are what are called secured loans; the loan is secured by a lien on your home or car. This means that if you do not pay off the loan as agreed, the lender can take and sell the home or car and use the proceeds to pay down on the loan.
In addition to a first mortgage on your home, you may have a home equity loan or home equity line of credit (HELOC). Sometimes you may have been given a checkbook and if you need take a draw on the home equity loan or HELOC, you just write a check. The check amount will be added to the amount owed.
What you may not realize is that home equity loans and HELOCs are secured loans; the amounts due on the loans are secured by a mortgage on your home. If you default on the home equity loan or HELOC, the lender can foreclose on the mortgage, sell your home and use the sale proceeds to pay down on the loan.
Similarly with car loans. If you do not pay as agreed on the car loan, the lender can repossess the car, sell it and use the sale proceeds to pay down on the loan.
What you also may not realize is that if a secured lender takes and sells your home or car after your death and the sale proceeds do not pay off the loan, the lender can have a claim against other assets in your probate estate or trust for the shortfall. This has come as a shock to more than one family who thought they could just abandon Mom or Dad’s home or car to the secured lender, thinking that there would be no more obligations on the loan. The estate then gets sued by the lender for the deficiency on the loan after the home or car sale.
Some families have also thought they did not have to pay off the loans after a death. They did not tell the lender about the death and they thought they could just continue making the monthly payments. In this electronic age, lenders almost always eventually find out about a death.
Practically every residential mortgage that I have reviewed in the last thirty years has what is called a “due on sale” or “due on transfer” clause. This includes the mortgages on home equity loans and HELOCs. If your home is sold or transferred, the entire balance due on the loan is payable in full.
If your home is owned solely by you, at your death, your home becomes property of your estate, triggering the due on transfer clause in your mortgage. If you have a transfer-on-death or Ladybird deed on your home, ownership also transfers upon your death, triggering the due on transfer clause.
Similarly with car loans. If there is a loan on your car, the loan will have to be paid off upon your death. In most of the car financing agreements I have reviewed, death is considered a default of the loan triggering acceleration of the entire balance of the loan to be due in full immediately. In that instance, before the car can be transferred out of your name, a release or discharge of that loan would need to be issued by the lender after the auto loan is paid off.
If the loan has a high interest rate or the lender wants to avoid a foreclosure of a mortgage or repossession of the car, the lender may allow your estate or beneficiaries to continue making the monthly payments on the loan. In those situations, it is usually Let’s Make a Deal with the lender.
If your estate debts are in excess of the value of the assets or property of your estate, the creditors are the only ones who actually have an interest in the estate. Your family at that point has no real legal interest in the estate because pursuant to Michigan law, creditors’ claims have priority over bequests and inheritances.
When there are more estate debts than assets, there is usually no need for your loved ones to go through the time, effort, aggravation and expense of the probate court process. If they did, they would be just going through an exercise for the benefit of your creditors. If your creditors want the assets, your loved ones should let them go through the probate process at the creditors’ own expense.
We’ve had a number of families over the years just abandon their loved one’s estate assets because the deceased’s debts exceeded the assets. The families just notified the lenders that there was not going to be any probate, which allowed the lenders to proceed with the foreclosure or repossession process.
However, property which passes to your loved ones through joint ownership or by a transfer- or payable-on-death beneficiary designation, is not considered an estate asset and is generally not subject to claims of estate creditors. We have done a fair amount of pre-planning for people whose debts exceeded their assets but still wanted to leave an inheritance. Their loved ones did not have to pay off their home or car loans, but still received an inheritance from Mom or Dad.
For example, we had one client whose home was upside down in which her mortgage loan balance was about $100,000 more than the value of her home. She had bank and other accounts totaling about $80,000 that she wanted to leave to her children. If everything went through probate, her children would receive nothing.
In that situation, we left the home in her sole name and made sure there were transfer- or payable-on-death beneficiary designations on all her bank and other accounts. At her death, the family would just abandon her house, but would receive the entire $80,000 in her bank and other accounts free from any claims by the mortgage lender. The lender would have foreclose or probate the house to get what they could.
Similarly with a client who had a lot of unsecured credit card debt. We prepared a transfer on death (Ladybird) deed for the home and made sure there were transfer- or payable-on-death beneficiary designations on all his bank and other accounts. At the time of his death, his children would receive his home and all his bank and other accounts, but would not have to pay off any of his credit card debt.
If you have concerns about what will happen with your home or car loans or other debts after your death, the best thing you can do is to consult with a knowledgeable estate planning and elder law attorney. The attorney should be able to review your car and home titles and loan agreements in order to make a determination of what needs to be done with your home, car and other debts and assets.
By Matthew M. Wallace, CPA, JD
Published edited January 14, 2018 in The Times Herald newspaper Port Huron, Michigan as: What about mom’s home and car loans?