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Dear Real Estate Adviser,

I own several homes with mortgages but no reverse mortgages. All the homes have equity. What happens to them after I die? Will my heirs have to apply for new loans, or will these houses be foreclosed on?

— Eva N.

Dear Eva,

Your homes needn’t be foreclosed on, especially given your equity position in them, but yes, your heirs may have to apply for new loans if they want to retain ownership.

Banks want their money back

Lenders do expect such accounts to be settled soon after the death of the owner. This can be done with cash, of course, which is sometimes made possible with inheritance, or by taking out a new mortgage. The heirs would have to qualify for a loan much as you did, with annual income, credit ratings and possibly even a new down payment.

If your heirs can’t or don’t want to pay off the notes (you should discuss their wishes with them soon), they’ll need to sell the homes to repay your loans. If they sell for more than their balances due, which may be the case given your equity, they’ll pocket the difference. If the homes are sold for less than the balances due, the heirs won’t owe additional monies. But if you were to specify that a house or houses will go to one or more beneficiaries “subject to the mortgage,” then those heirs must pay off the mortgage or your estate must settle it.

A more complicated way

All that aside, if you place your properties in a limited liability corporation, or LLC, assuming they’re rental homes, they probably could be transferred with a little less bureaucracy to your children upon your death. You could simply will specific membership certificates in properties to them; no deeds must change hands. Of course, if your loan was in your own name, it won’t protect the new owners from loan default should they decide to remain in the house but get behind on payments.

Don’t forget estate tax

Also, if you have enjoyed huge value increases in the homes since you bought, you may have to consult a tax professional to mount a strategy to minimize estate tax, but only if your estate exceeds $5.43 million, the 2015 cap, according to the IRS.

You can’t evict immediately

And by the way, it may take longer for your heirs to cash in on rental homes because your death won’t terminate the tenancies/leaseholds of the renters. Your heirs would also be legally obligated to honor damage deposits and other written arrangements and to notify tenants of the change in ownership.

Make a will

By the tone of your letter, it appears that you’ve yet to make formal arrangements to pass on these assets. If you were to die intestate (without a will), your estate would follow your specific state’s laws of succession, and that may put your heirs through needless red tape and strife.

While you can always assemble a legal will using online forms — you’ll need two witnesses and notarization — you’d be far better off in this case securing the services of a professional, such as an estate attorney, real estate attorney or Certified Financial Planner professional. Such a pro can help you safeguard your intentions, minimize any tax hits and determine whether an LLC is appropriate. Thoroughly vet this person first, including a phone or personal interview, and do some online research for reviews, professional ratings, etc. You should also ask this person if an orderly liquidation of at least some of your homes now might be advantageous.

Here’s hoping your legal protections will help make this an orderly and less stressful transition for your family when the time comes.

Good luck and live long!

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