Bequeathing property and mortgages to beneficiaries

[Tasman]

Hi all, I enjoy reading on this forum and have found it to be a valuable source of information. I have question which I think is relevant to other property investors, but never asked.

When I started on my property investment journey, living off equity growth was the harvesting strategy anticipated to be employed. This strategy advised never sell and simply pass property to children. In particular the FAQ my investment club (company/marketer) provided, was the question "won't your children be burdened by the mortgage debt?"

Answer "yes, but they will love the assets associated with the debt".

Thus it was stated children could continue the strategy of owning bequeathed property assets and harvesting the equity growth.

The amazing thing is at the club presentations, no queries on how do you pass from one person to another a mortgage debt. How do you manage this with your mortgagee? What happens when property of say $400,000 value and variable rate mortgage debt of maybe $300,000 is inherited by a relative of the deceased?

Thanks for your anticipated replies.

 

[Kristine..]

Hello Tasman

Well, the short answer is 'you can't' pass the debt.

The beneficiaries do not inherit title to the property or whatever asset it is until all debts are satisfied and probate has been declared.

You may have died but your mortgage 'to the death (of the debt)' has not.

That debt is still active and your estate must settle the debt during the process of probate.

One of your heirs may decide that a particular property / asset is worth buying, but they must then buy it from the estate, arrange their own mortgage etc.

So if your estate does not have enough other assets to realise to satisfy the debts, then the assets will be sold. So if you have accessed, say, 80%LVR in borrowings, by the time the undertaker is paid, the trustees and solicitor are paid, the estate is finalised and probate declared, all of the remaining 20%LVR may have been used up in the processing of the estate.

That is why people who really care about 'Estate Planning' have life insurance or at the very least, insure the mortgage loans.

The insurance policies can then either pay into the person's estate, or pay out the specific mortgage.

It all sounds easy at seminars, but true estate planning costs the living money, no matter which side of the Will they are on.

Cheers

Kristine

 

[Tasman]

Hi Kristine, thanks for your reply, very clear and practical.

I am a little surprised by the insurance solution, but I think you are inferring that insurance of debts for when you die of natural causes is expensive.

The sale of assets to pay debts when the will is executed, as you have explained more explicitly, is also how I thought the deceased estate would be disbursed.

Actually, I thought the answer might lie with Hybrid Discretionary Trusts where the Trust owns the properties and also held the mortgages. Thus the death of a parent beneficiary would not become an issue with a mortgagee.

Ideally the prior to expiring, the parent who would be Appointer (most powerful person within a trust structure) of Trustees would make another beneficiary/child Appointer and Trustee. This still should not alarm mortgagees, as the 'Trust Entity' holds the mortgages, and so there is no change in mortgagors.

Also I would qualify that the trust funds were cash flow positive with mortgage LVR's sufficiently low to enable this, or other investments such as shares dividends assisting cash flow positive.

I think there are probably problems with the above concepts; however, they are my current thoughts.

Cheers

 

[geoffw]

I don't know how expensive insurance would be.

But you are not insuring the debt. You are insuring yourslef for a lump sump, which would be enough to pay out your debts in the event of your untimely demise. If you are young, healthy and a non smoker, it would probably not be too expensive. If you require insurance vey quickly without time for a medical examination, it will cost much more (as might be the case if you were buying into a business with a big loan ).

Your other question might be- how expensive it would be if you do not have the insurance?

I have had two friends die quite young recently, both in IT on good incomes. One left very little behind- his new wife and young kids were left with virtually nothing. Tne other had had income protection and other insurance in place- when he developed cancer, his income was covered, and when he died, the insurance left enough for his house to be paid off and for income for his wife and 8yo child.

 

[Tasman]

I don't know how expensive insurance would be.

But you are not insuring the debt. You are insuring yourslef for a lump sump, which would be enough to pay out your debts in the event of your untimely demise. If you are young, healthy and a non smoker, it would probably not be too expensive. If you require insurance vey quickly without time for a medical examination, it will cost much more (as might be the case if you were buying into a business with a big loan ).

Your other question might be- how expensive it would be if you do not have the insurance?

I have had two friends die quite young recently, both in IT on good incomes. One left very little behind- his new wife and young kids were left with virtually nothing. Tne other had had income protection and other insurance in place- when he developed cancer, his income was covered, and when he died, the insurance left enough for his house to be paid off and for income for his wife and 8yo child.

Hi GeoffW, thanks for your comments on life insurance. I believe as in your cases above, the time when you need life insurance the most is when you have dependents in early wealth formation years with dependent spouse and children.
On the other hand, when your spouse has own career and income, the children are grown up, significant accumulated sick leave by both partners, superannuation’s with death benefits, and net asset wealth, the need for life insurance is a questionable expense. Especially as your age progresses insurance become more expensive and the risk is diminished for reasons above.

Cheers
PS reading Kristine's reply again, she did also refer to insuring the mortgage debt as another option. I have assumed this is an expense not necessary again for reasons above, but if it was relatively low cost, could be worthwhile.

 

[Medine]

Hi Tasman,

Your Financial Planner is the best person to talk to about Estate Planning. It is an integral part of your plan. They will consider your debt, insurance and what your wishes are for when you die.

If you have Total and Permanent Diasability and Death insurance through your super (TPD), you may find that your debt is already insured, because any debt will be able to be paid out when you die. This form of insuance is usually very cost effective. You may also be able to apply to increase it.

Cheers, Medine

 

[Twitch]

Actually a solicitor is a good person to talk to about estate planning, rather than a financial planner. A solicitor can draw up an appropriate will with trust(s) as appropriate.

 

[Medine]

Hi mdk,

You're right, you will need to use a solicitor. However, usually a solicitor won't take your full financial and insurance situation in to account, so I prefer to work with a Planner (who does), and let them work with the solicitor.

Cheers, Medine