Life Insurance and Mortgage Payoff

[Lyn0202]

I currently owe $75,000 more on my house than it's worth. I have a $250,000 life insurance policy, that goes to my son. My question is: upon inheriting the house and getting the $250K, is he forced to pay off my mortgage (currently $258,000) or can he do a short sale and keep the $250K? At this point, I'm wondering why I'm wasting money on life insurance if it's all going to the bank in the end anyway. My guess would be that the estate pays off the mortgage first before anybody gets anything, but is life insurance with a direct beneficiary NOT part of the estate? I live in Arizona and my son lives in New Jersey, in case that matters. Thanks!

 

[latigo]

The proceeds of a life insurance policy pass directly to the designated beneficiary outside of probate, and as such are not an asset of the estate subject to the claims of the deceased policy owner’s creditors.

Hopefully you will enjoy many more years of good health and less worrying about things you don’t need to worry about. Like your heir being personally responsible for the payment of the mortgage.

 

[Zigner]

Why would you plan on giving him a house in which he's upside down as soon as he gets it. If your "plan" is to have him sell the house at a loss, he'd be better off not having it.

Seek the advice of an estate planning professional.

 

[Lyn0202]

I didn't know there was any other way to do it. My will leaves everything to my son. I assume that includes the house. Is there a way to exclude the house from the will? I don't want him to get stuck with it. If I could figure out a way to get rid of it now, I would. But I really love the house and the location, and I CAN afford the mortgage. I'm only 46 so I don't see myself dying in the foreseeable future, but one never knows. Hopefully by the time I die, the house will be worth more than I owe. But with this market, who knows? Mostly I was concerned about throwing away money on a life insurance policy that would benefit no one. But if he gets it, then it's worthwhile.

 

[justalayman]

It's not that he will get stuck with it. It's that your estate will get stuck with it. You cannot will something to your son you do not possess and if your estate is in a negative net worth situation, there is nothing for your son to inherit.

My guess would be that the estate pays off the mortgage first before anybody gets anything, but is life insurance with a direct beneficiary NOT part of the estate?

correct BUT the mortgage/house situation might be able to be negotiated the bank accept the title in lieu of foreclosure. The problem is how to figure that out before the time comes when it is needed.


but as others have said; the insurance is paid to the beneficiary outside of probate. The bank will have no knowledge of the payment and no right to that knowledge.

 

[TrustUser]

a person does not have to take ownership of an asset, because a will gives it to him.

 

[FlyingRon]

He doesn't have to take it, but he can if he chooses to and continues to make the payments on the loan.

 

[justalayman]

a person does not have to take ownership of an asset, because a will gives it to him.

that is true but as part of the estate, the mortgage must be addressed before son can take of any part of the estate. It's not like he can simply ignore the mortgage and take the rest of the estate. The estate is valued as a whole and what ever is left, son gets. The house, whether it be a credit or debit to the accounting is part of that estate.

 

[TrustUser]

regarding the estate (so life insurance not included) - the heir is not forced to pay the mortgage. what occurs if the creditors decide they dont want the assets ?

 

[justalayman]

the estate still owes the debt and that debt must be taken care of by the estate.

the heir cannot be forced to pay for the mortgage but the estate of the decedent can be required to pay for it.

 

[TrustUser]

i did not pose my question correctly.

in a general case, does the executor simply sell the assets to pay off the debt ?

it would seem to me that the creditors would want some sort of control.

or does the court simply make rulings when the estate can not pay off its debt ?

in this particular case, the only thing that we know that is in the estate is a house whose mortgage is more than the worth of the house.

normally, that house would simply be foreclosed upon by the lender. and my question was about what if the lender did not want to take back the house. the heir refuses to take the house, cuz he doesnt want the debt associated with it. and the lender has chosen not to take back the house, because it may be more hassle than it would ultimately be worth ?

what happens to it ?

 

[justalayman]

.

in a general case, does the executor simply sell the assets to pay off the debt ?

that is a possibility

it would seem to me that the creditors would want some sort of control

.such as? I do not understand why you believe the creditors would have any control

or does the court simply make rulings when the estate can not pay off its debt ?

again, not sure what you mean. If all of the assets of the estate are converted to cash and used to pay the debts of the estate yet there remains debts, then the creditor is just SOL and obviously there is nothing for the heirs to take.

in this particular case, the only thing that we know that is in the estate is a house whose mortgage is more than the worth of the house.

and? that does not alter the amount the estate owes for the mortgage.

normally, that house would simply be foreclosed upon by the lender.

not true. It is possible but a lot of it is as a result of what happens in probate.

and my question was about what if the lender did not want to take back the house. the heir refuses to take the house, cuz he doesnt want the debt associated with it.

the estate still owes the debt so it doesn't really matter what the heir wants. He cannot simply ignore that debt of the estate because he does not want the house or the debt and take money from the estate. The estate is liable for that debt first. Once all the estate debts are paid, if there is anything left, the heir gets it.

and the lender has chosen not to take back the house, because it may be more hassle than it would ultimately be worth ?

what happens to it ?

the estate must deal with it. the estate owes the lender the money until it is paid back and if it takes selling the house and all the rest of the assets of the estate to pay off the mortgage, then that is what happens.

there is no money to take from the estate until ALL of the debts of the estate are settled. If there is money remaining after that time, then the heir can take. If there is no money left in the estate, the heir gets nothing.

If there is negative value of the the estate, the heir gets nothing and some of the creditors get the shaft.

 

[TrustUser]

we dont seem to be on the exact same frequency.

i understand that the heir can not take from the estate, until creditors are satisfied.

the reason why a creditor might want some control is just what you alluded to - some creditors will get the shaft. just who controls which creditors get the shaft ?

assets could be sold for cash, and distributed to creditors. however, creditors may or may not want that. another reason why i think a creditor might want some control over what happens.

 

[anteater]

the reason why a creditor might want some control is just what you alluded to - some creditors will get the shaft. just who controls which creditors get the shaft ?

State statutes.

 

[justalayman]

assets could be sold for cash, and distributed to creditors. however, creditors may or may not want that. another reason why i think a creditor might want some control over what happens.

isn't the point to pay off creditors? Why would converting assets to cash and then using that cash to pay off a creditor a bad thing?

if they don't want cash, what else do you suggest they would like to be paid in?

depending on the state and the size of the estate, creditors may actually have some say in the overall direction of the probate. In smaller estates, it is often as simple as who the executor writes the checks to first.