By Dylan Recht and Jeffrey H. Lerman
Lerman Law Partners

The aging Boomer generation and COVID, are “propelling the nation toward a milestone: A historic increase in number of deaths every year,” according to the U.S. Census Bureau1. In fact “As the nation’s baby boom cohort ages (the youngest are 53 this year), the number and percentage of people who die will increase dramatically every year, peaking in 2055 before leveling off gradually”1 and this prediction does not include deaths from COVID. It is therefore imperative that mortgage professionals understand, now more than ever, what happens when your borrower and/or investor dies.

Treatment of Mortgages at the Death of an Investor or Borrower

When a borrower or investor dies, anxiety can be felt among a wide array of people – family members, business partners, lenders, and co-signors; all of these individuals may worry about the impact of the death on mortgages secured by real estate. Luckily, federal law allows the assumption of a mortgage after the death of a borrower or investor in many circumstances. Even if a mortgage contains a “due on sale” clause, the Garn-St. Germain Depository Institution Act of 1982 often prohibits enforcement of the “due on sale” clause after the death of a borrower. Particularly, “due on sale” clauses cannot be enforced when the secured property is received as inheritance by parents, children, or other relatives through a trust, probate estate administration, or joint title. The parties inheriting the property must continue to make payments on the loan. Also, there are federal regulations in place that extend the protection of federal law to individuals who qualify as a “successor in interest” of a deceased original borrower. If an investor dies, the right to receive payment can pass to the investor’s successors in interest.

However, without proper estate planning, there is a strong possibility the death of a borrower or investor will result in probate court administration of the deceased individual’s estate. A probate court estate administration might result in substantial delay in access to funds that would be needed to make payments on an assumed mortgage. One way to ensure immediate access to funds that would allow a deceased borrower’s family to continue payments on a mortgage is to keep a small joint account or “pay on death” account with a family member who would assume a mortgage in the event of a borrower’s death. However, this does not cover the possibility that the joint account holder or pay on death beneficiary also dies. The best coverage is provided by a living trust: during a borrower’s incapacity or after the borrower’s death, a well-funded living trust would allow immediate access to a Trustee, who could continue to make payments on a mortgage.

Further, if an investor dies without a living trust as a California resident, the right to receive income from a mortgage would pass through probate court administration. A probate court administration takes at minimum 4 months, but ordinarily takes more than a year to complete due to heavily burdened probate court calendars, limited court staffing, and backlog. All investors should have a full estate plan, including a living trust as the centerpiece of the plan. A living trust avoids probate in California, and can save time and expense. Probate court administration attorneys are compensated based on the value of the assets of the estate, whereas post-death trust administration is often billed at attorneys’ hourly rates.

However, a living trust does not provide asset protection during life or after the death of the investor. Investors should consider forming an LLC to hold their assets that may expose them to liability, and own their LLC membership interests as trustees of their living trust to avoid a probate court administration of the LLC membership interests. An LLC is not a replacement for a properly funded living trust: having an LLC owned in an investor’s individual name does not avoid probate court administration, even if the LLC operating agreement outlines succession of the deceased investor’s interest. If you have any questions about this topic, please contact the authors below.

Endnote

  1. Source: https://www.census.gov/library/stories/2017/10/aging-boomers-deaths.html (emphasis added)

Dylan Recht, Estate Planning Attorney, Partner, Lerman Law Partners and Jeffrey H. Lerman, Real Estate Attorney, Co-Founder of Lerman Law Partners (realestateinvestorlaw.com).