When setting up an estate plan, most people are concerned with what will happen to their belongings: money, jewelry, house, etc. But little thought is ever given to what will happen to their debts when they pass away, notably their mortgage.
For years, many people expected to pay off their mortgage long before they died, but the current financial landscape paints a much different picture, especially as more and more seniors take out mortgages and home equity loans to cover cost of living expenses. An analysis of data from 2001 – 2011 showed the number of homeowners aged 65 and over who held a mortgage increased from 22% to 30%, while homeowners aged 75 and over who held a mortgage more than doubled from 8.4% to 21.2%. These startling figures may prompt estate planning clients in DuPage County to ask themselves, “What happens to my mortgage if I die?”
The simple answer to that question is that after you die, the mortgage belongs to whoever inherits your house. The complications arise when it comes time to determine how exactly the mortgage will be paid off. Below are some common scenarios that DuPage County estate planning attorneys have seen when a person dies while holding a mortgage.
Your estate pays off the mortgage. This may be the most desirable scenario, though it can only occur through careful legal and financial planning. In order for the estate to pay off the mortgage, the estate must of course have enough assets to cover the debt. This may leave your beneficiaries with less cash distributions, but they will own the house free and clear. It is possible to make a provision in your Last Will or Trust to have the mortgage paid through estate or trust assets, but it is recommended that you consult with a DuPage County estate planning attorney to determine what your situation is and how to best address it.
Your beneficiaries pay off the mortgage. Of course, beneficiaries may already have mortgages of their own, so this could lead to some complications. If the beneficiaries are willing and able, they may take over the monthly mortgage payments for your house. In this case, your beneficiaries could refinance to get a better interest rate on the mortgage. If your beneficiaries already own their own home and have a mortgage, they could sell either their home or the inherited home to pay off the respective mortgages.
If the property is worth less than the value of the mortgage, confer with the lender to see if a short sale is possible. If the lender agrees to a short sale, the home would be sold for less than the value of the debt, but the estate would not be held liable for the difference or loss. You can discuss these possibilities with a DuPage County estate planning lawyer to determine what may be the best course of action to take.
It is important to review both assets and debts with your DuPage County estate planning attorney when forming your estate plan. Please contact us immediately at (630)908-2752 to set up a consultation so we may review your estate planning options.
Inheriting an IRA can be a financial blessing but you have to be extremely careful about withdrawing the funds. There are a number of mistakes you can make that can result in a missed opportunity for tax-deferred growth, or worse, a huge tax bill.
Luckily, surviving spouses have some leeway. It’s still tricky to transfer from spouse to spouse. But the rules for spouses are different than non-spouses.
If you have more than one child, it may seem logical to name the estate as beneficiary. This is not always a good idea. In this case, your children will be required to take all of the money out of the IRA by the end of the fifth year after your death – missing the opportunity to accumulate interest and enjoy the tax sheltering benefit.
Owners of traditional IRAs must start taking the required minimum distribution (RMD) when they turn 70 ½. Non-spouse beneficiaries must start taking RMDs upon inheriting. This means you can’t leave the entire amount in the account, allowing it to draw interest. The penalty for not taking RMDs on time is steep: A full 50% penalty on the amount that should have been withdrawn for the year!
Unfortunately, non-spouse beneficiaries can’t roll an inherited IRA into their own IRA. A separate account Inherited IRA must be set up and titled so that it includes the decedent’s name, the name of the person inheriting, and an indication of the purpose of the IRA. For example, it might say, “Rhonda Smith (deceased January 7, 2015) IRA for the benefit of Roy Smith.” If the account is split among beneficiaries, the original IRA must be split into separate IRAs and each one must be titled in the same manner.
To avoid this pitfall, name a separate share trust drafted by an experienced estate planning attorney to qualify as a permissible beneficiary of the IRA ( or your children directly if asset protection is not important to you or your children), and not the estate. By doing so, they will have a lot more flexibility. They can take annual distributions based on their own life expectancy which allows them to leave the money in the account and defer taxes.
Roth (not traditional) IRAs can usually be withdrawn tax-free. But, your beneficiaries will be prohibited from depositing them into their own IRAs and they’ll have to pay taxes on the whole amount.
The issues above are just some of the traps you can fall into when inheriting an IRA. When it comes to transferring IRAs, it is critical to seek the advice of a qualified, experienced estate attorney in DuPage County. They can help you decide whether or not to withdraw the funds or set up an Inherited IRA.
If you have questions about how to inherit an IRA or if you want to make sure the beneficiaries on your IRA are set up correctly, give our DuPage County estate planning law firm a call at (630) 908-2752 for assistance.