Q: My husband and I made an offer to my mother-in-law to take over her mortgage. Well, actually, my husband and his mom are taking out a mortgage together and putting the house into a trust, naming themselves as the trustees and all the siblings as the beneficiaries.
In the process of acquiring this mortgage, we found out that my mother-in-law has more credit card debt than she originally told us. I am under the impression that, upon her passing, the house will have to be used to pay off any outstanding debts she may have before it can pass through the estate to her children, even though my husband will technically co-own the home with her.
Is this true? If so, we will likely bow out of the agreement. Is there another legal way to take over her home and mortgage without being subject to insane taxes in the end? This is the only way we are willing to help her financially without feeling like we’re enabling her.
A: It’s nice that you and your husband are willing and able to help your mother-in-law. We looked at your question and see that you have three important issues that should be addressed: First, whether your husband should take out a loan to help his mother; next, whether your husband should be on the title to the home, either directly or through the trust; and, last, whether your mother-in-law’s credit card debt will affect her estate when she dies.
Let’s start with the last issue first. When a person dies with debt, the person handling the estate (the executor) is obligated to pay off those debts from the assets owned by the estate.
Let’s say your mother-in-law dies and has $20,000 in credit card debt. The executor of her estate is obligated to use funds to pay off those debts from any cash she had left in her bank accounts or from the sale of any assets she might have owned.
On the issue of taking out a new loan and having your husband be on the title with your mother-in-law, he would be taking on an obligation to pay a debt she has that he otherwise would not have.
Let’s assume that your husband is debt-free. When he signs on the dotted line with his mother, he will be responsible for the mortgage loan payments whether his mother contributes to those or not. At the same time, however, he will be a part owner of the home.
Last, it’s noble of the two of you to help your mother-in-law so long as your intent is not to avoid having to pay off her debts. The transfer of the home into the trust might end up depriving her creditors of money they otherwise would have received at the time of her death. If the trust is structured in a way that upon her death the home automatically transfers over to your husband, then the property would not go through probate because at the time of her death the home would no longer be part of her estate. As such, the home would not need to be sold to satisfy the debts of your mother-in-law.
But the creditors could claim that the transfer of the home into the trust was used to avoid having to pay them the amount they were owed. They would have up to two years from the time the home was put into the trust to make that claim; so if your mother-in-law is quite ill now, and you are doing this to avoid paying them off, you might be in for a rude awakening.
If, on the other hand, your plan is for estate planning purposes, your mother-in-law is paying her debts, she has other assets and it doesn’t seem like you are undertaking the transfer to deprive creditors of what they might be entitled to get to satisfy her debt, you should be fine going forward.
But let’s talk a bit about the mortgage your husband is considering applying for with his mother. You should know that being on the mortgage with his mom might thwart the two of you from obtaining a mortgage of your own or refinancing a mortgage you may have.
The loan with his mother will affect the amount of debt he has; and if you or he need a loan, the lender will view that loan — the whole loan — as his. Even if his mom is paying the monthly payments on the loan, the new lender may decide not to give you a loan since he already has the obligation to repay the loan with his mother.
We can’t go through all the issues here, but if your husband is working with an attorney to put the property into a trust, he should talk to that attorney more about the issues relating to his mom’s creditors and what might happen with the ownership of the property upon her death.
He will have the sole responsibility to pay the mortgage each month, but he won’t control the ownership of the home. As a co-owner (with his mom or with his siblings), everyone will have to agree to sell the property. If there is no agreement, the loan will remain in place and the home won’t be sold whether there are assets to pay the mortgage on the home or not.
Finally, you might want to talk to a good mortgage lender or mortgage broker whom you have used in the past to see what consequences your husband might face with regard to his credit. In addition, he should talk with an estate planning attorney, an enrolled agent, an accountant or a tax preparer about any federal or state consequences relating to the transfer of the property.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.