Mortgage Liability question…. if FIL passes

[Aiming_4_55]

Yesterday during dinner with the extended family, hypothetical scenario on mortgage liability was brought up. I tried to avoid the topic as I felt no one really wanted to discuss it.

My brother-in-law, the youngest of the adults, said, if Dad passed (age 70+, home value $90k, mortgage balance $140k, loan modification completed summer 2011, payments affordable for the next 5 years, then interest rates goes up) where would things land? Almost everyone got quiet. He then said really, should we have money on the side to plan for things, i.e. travel (Dad lives out of state), funeral expenses, mortgage, credit cards, etc.

The sister-in-law with the closest knowledge said it’ll be covered. The BIL said everything? SIL said probably. I said we all kind of know from personal expenses shared when Mom passed which was not all covered. I would anticipate some out of pocket expenses since she had a larger life insurance policy than Dad.

Previously Dad chatted with me about his life insurance policy of $20k, so I kind of know it’s a small policy. I also know he was questioning the need as he was trying to cut expenses.

Who gets first dibs of the estate?
- Funeral expenses
- Healthcare costs (has various Medicare, etc. but some out of pocket expenses)
- Mortgage Company

Assuming the mortgage exceeds the policy value, they will foreclosure on the property when the time comes was my assumption.

While the SIL is thought of as the “leader”, she has her limitations. I hinted that she as the executor of the estate to maybe research various scenarios. One, what is the cost of the policy vs. cost of funeral as it might be better to self-insure for that.

Some thought that the estate would get choice of which bills to pay (translation, pay nothing and pocket as inheritance – no expectation here.).

Thoughts? Thanks for your feedback.

 

[brewer12345]

First thing I would check is state law. If you are in a non-recourse state, the lender gets the house and that is all they are entitled to. Otherwise, this is probably a discussion to have with an estate attorney.

 

[Aiming_4_55]

Florida - which appears to NOT be a non-recourse state, so that's not good news.

First thing I would check is state law. If you are in a non-recourse state, the lender gets the house and that is all they are entitled to. Otherwise, this is probably a discussion to have with an estate attorney.

 

[meierlde]

The order is lawyers fees, administration expenses, the mortgage company and other creditors, then the beneficiaries. Now included in the expenses would be any fixing up to sell the place if needed. Note that a living person has to sign for the funeral expenses just in case there is no money in the estate. Note that the only money the mortgage company could go after would be anything else in the estate.

 

[pb4uski]

But wouldn't the $20k of life insurance proceeds go directly to the named beneficiaries and could be used by them to pay for funeral costs and be beyond the reach of the lender and other creditors? and they could retain any excess? I suspect so.

Then the lender and the hospitals will fight over any assets other than the house (with the house obviously going to the lender). If there is a shortfall then the lender and hospitals will have writeoffs.

 

[Aiming_4_55]

I believe a family member is named in the life insurance policy however it is unsure anything is in place to direct the beneficary to use said funds to pay funeral costs first. (Recently a family member contacted me to offer selling me a building, when I looked up property tax/value, it was inflated from market value, $400k vs. 300k. When I asked about the difference, he said, he could let me have it for that since I was family. I declined and said I did not want him to "lose" the value, so sell it to someone else). I lost a bit of trust.

I believe FIL has some personal funds that he is guarding. This will probably get caught up to cover any estate expenses, but I think he is hoping this will go to the family.

But wouldn't the $20k of life insurance proceeds go directly to the named beneficiaries and could be used by them to pay for funeral costs and be beyond the reach of the lender and other creditors? and they could retain any excess? I suspect so.

Then the lender and the hospitals will fight over any assets other than the house (with the house obviously going to the lender). If there is a shortfall then the lender and hospitals will have writeoffs.

 

[pb4uski]

I think the beneficiary could do whatever they want with the death benefit, but I assume that the funeral home would demand some assurance that they would be paid for their services before doing the funeral.

Your FIL could use the personal funds he is guarding to prepay his funeral. If so, then the beneficiaries would get the life insurance proceeds and he could designate who in the family he wants those funds to go to.

Then the creditors would just fight over the remaining assets. It is likely that the creditors might try to shame the family into paying FILs bills but just tell them no.

 

[meierlde]

I think the beneficiary could do whatever they want with the death benefit, but I assume that the funeral home would demand some assurance that they would be paid for their services before doing the funeral.

Your FIL could use the personal funds he is guarding to prepay his funeral. If so, then the beneficiaries would get the life insurance proceeds and he could designate who in the family he wants those funds to go to.

Then the creditors would just fight over the remaining assets. It is likely that the creditors might try to shame the family into paying FILs bills but just tell them no.

On #1 a living person has to sign to say that if necessary they will pay the funeral expenses.
On #2 in most states it appears that funeral expenses and administrative expenses are the highest priority, with a 1 year family allowance in some states as well. But if one prepays the funeral then that becomes a non issue. Note that for an insolvent estate likley one will need a lawyer in the state in question to navigate the process.

#3 the creditors try the morality issue on folks but since business has no morality in matters of money why should ordinary folks?

 

[Walt34]

I learned a lot when I handled my mother's estate. Much depends on state law but for the most parthttp://www.early-retirement.org/forums/members/meierlde-16214.html meierlde is correct.

Also do not confuse who owns something. If there is a life insurance policy the benefit is not part of the estate - that is payable directly to the named beneficiary and does not go through probate because it is not part of the estate.

Assets of the estate are used to first pay off any outstanding debts. Who gets paid first is why you need an estate attorney because if the estate cannot pay off all creditors and the wrong one is paid first by the administrator/executor then the administrator is personally liable for the difference.

Secured loans such as a home or car are paid first using the secured asset, then remaining balance if any is paid using unsecured assets.

To the best of my knowledge the family is not responsible for a relative's debts. But some state may have a law differing on that.

Named beneficiaries in the will (if there is one) are last in line. If there is no will a court will decide who gets what based on state law.

 

[sheehs1]

Also do not confuse who owns something. If there is a life insurance policy the benefit is not part of the estate - that is payable directly to the named beneficiary and does not go through probate because it is not part of the estate.
.

If the decedent is the owner of the life insurance policy, I thought the only way life insurance proceeds were not includable in an estate was if the policy was in an Irrevocable Trust ( not a revocable one) Otherwise it is includable. I think the thought here was that in order for proceeds not to be included, they have to be "at arms length" and "untouchable".

The only other way I am aware of, is if the decedent is not "The Owner" of the policy. It matters who owns it.


Perhaps someone else can elaborate.

 

[pb4uski]

You are thinking of whether or not the proceeds are included in the estate for estate tax purposes, which is not an issue in this situation because the value of the estate will likely be negative based on the OP.

We are discussing whether the decedant's creditors can benefit from the life insurance.

 

[sheehs1]

You are probably correct. I went back to read the thread more carefully.
And I agree with your posts on the matter!