My father owned two properties when he died. Property A was a crumbling wreck with three mortgages, the bank is foreclosing and probably just tearing it down and selling the plot. They’ll be taking a yuge loss. Property B (in reasonably good repair) he owned free & clear, he let his sister and her daughter (my aunt and my cousin) live there rent-free for reasons that aren’t relevant here.
It’s been about 2.5 years since he died and it looks like the dust is about to start settling on the foreclosure of Property A. Can the bank that held the mortgages on Property A attach a lien/foreclose on Property B? Aunt Marsha is starting to get antsy…
FWIW, SissyHomie and I have been left entirely out of this mess. Neither of us wanted anything to do with either of his properties and we’ll both be glad to see the eyesore leveled. Neither of us wants to see Aunt Marsha homeless though.
Generally, the estate is responsible for paying the debts of the estate. That typically means converting the estate’s assets to cash. If there aren’t enough assets to pay the debts, then the creditors are left hanging. The heirs don’t have to cough up their own money to pay off the debts of the estate. I would think that in a case like this, the mortgage holder of property A could sue the estate for the balance of the mortgage. That might mean that property B would need to be sold. This is definitely a situation where you should talk to an estate attorney. If there are ways to protect property B, the attorney will know what to do.
Talk to a lawyer and find out what your state’s rules on deficiency Judgments are. Some states allow them, some don’t, sometimes it depends on how the foreclosure was done. Only a local lawyer can tell you what your situation is.
Note that another gotcha in this situation is the bank’s loan loss can be considered income to the deceased and therefore taxes paid on that income by the estate. This is a big thing and not to be ignored. If you get a 1099-MISC from the bank, you have paperwork to do.
Good general statement, to which I’d tack onto the end: " … hanging for the deficiency".
IOW, all the creditors collectively get first bite at all the estate’s assets collectively. After they are all fully satisfied, if there’s more left over the heirs get that residual. And if the estate comes up short on the total debt vs. total assets comparison, the various creditors share in the haircut subject to a bunch of detailed rules. And as a result, the heirs are left empty-handed.
And, as said, there are a bunch of loop-holes, carve-outs, etc., which can leave (some of) the creditors short and also leave something for at least some of the heirs.
This is one situation where a Transfer on Death Deed would have been very useful. If you’re not aware, a ToDD is a document you file with the county that causes ownership of your property to transfer to someone else when you die. The property doesn’t go through the estate. If the father had filed a ToDD granting the property to Marsha upon his death, then she would have taken ownership of it without it going through the estate. And since it would not be an estate asset, the creditors would not have claim to it.
It’s obviously too late now for the OP’s situation, but anyone with property should consider filing a ToDD for their properties to avoid this happening to their estate. It’s a simple document that you can do yourself, or a lawyer can do it for a relatively modest fee.
What’s the capital gains aspect of this? Is it technically considered a “sale”? Or are gains due on the father’s original price when it eventually sells?
It should be treated like an inheritance. The beneficiary receives the property with the value based on the current value of the property without any tax implication. The beneficiary would potentially owe taxes when they sold. In that case, taxes would be based on the difference between the selling price and the value when the original owner died.
For comparison, there is something called a Quick Claim Deed. This is used by a living person to assign property to someone else at the time the QCD is filed. Basically, it’s just changing the name on the deed without any cash changing hands. It is a taxable event based on the value of the property at that time. From a tax perspective, the QCD is treated the same as if the recipient received cash of whatever value the property has.
In the OP’s case, if he had done a QCD to Marsha, she would have taken immediate ownership of the property, but it would have been a taxable event (gift tax, maybe?). If he had done a ToDD, Marsha would take ownership upon dad’s death, but there would be no tax implication. The value of the property would be set at whatever it was at the time of dad’s death.
How do creditors prevent abuse of using a ToDD to escape paying off debts?
If you have a mortgage, does that mortgage automatically get transferred to the beneficiary or can the loan company demand immediate payoff/reworking of the loan terms?
So many questions.
ETA: Let’s say I have property in Colorado and South Dakota and my son lives in Louisiana and I live in Arizona. Where do I file the ToDD?
The ToDD needs to be filed in the county where the property is located. It just changes the name on the deed. Any loans/liens are still valid and would be liabilities for the new deed owner. The new deed owner may need to qualify for the loan. The loan holders can call in the loan if they want. If the beneficiary doesn’t want to take on the property, they can refuse to have it transferred to them. So if there was a huge mortgage on the property, the beneficiary may not want to take it on.
The benefit of the ToDD relative to creditors is that general creditors of the estate would not be able to get to the property. So the credit card companies couldn’t sue for the value of the property to get the CC balance paid off. But the lien holder of that property still has their claim to that property. That lien doesn’t go away just because the deed changed ownership.
I think the idea was that the property (B) where Marsha was living has no mortgage and Marsha would be added as a TOD so the bank that holds the mortgage on the other property (A) couldn’t force a sale of B to pay a deficiency judgement on A , if there is one.
Although I’m not 100% sure TOD would work - if it appears that the transfer was to avoid paying a debt creditors can sometimes go after non-probate assets.