Estate Planning: Beware of the Gift of Debt

HNW Elder Law, Estate Administration and Probate

It’s great to inherit property but what if that gift has a big string – a debt attached to it as is common with real estate or a car?  If so, the question becomes whether the debt must be satisfied from the decedent’s estate by the beneficiary.  How this question is answered can have a significant big swing in the respective consequences to the beneficiary of the gift and the beneficiaries of the estate.

Increasingly, the law starts from the premise that property left to someone as a gift includes the debt on the property unless the decedent in his or her will clearly states a different intent.

A general directive in the will to pay all debts of the testator is a good start. It suggests the decedent’s intent.  If the intent, however, is not to attach the debt to the gift, language something like this should be used in a will: “If [the specific asset] is subject to a mortgage, security interest, or other liens, I direct that my executor pay the debt from other prop¬erty of my estate which is not given to a specific person or entity.”

This scenario was played out recently in a case where a father left to his (favored?) son three different properties, each of which was encumbered by debt. To his other son, he left the residue of the estate. When the father died, the executor used part of the estate proceeds to pay off the loans on the real estate, so that the first son would receive them debt-free. Not surprisingly, the second son, whose inheritance was thereby diminished, brought the matter to court.

The second son prevailed, forcing payment of the debts for the real estate to be paid by the beneficiary. The father’s will directed in a general way that debts were to be paid from the estate. However, under the relevant state statute, that was not a sufficiently explicit directive to establish that the debts of the real estate were to be paid from the residuary estate. In other words, the will had not clearly shown an intent that the first son was to receive the farms debt-free. As a result, the first son got the three farms, but he, not the second son, also got the responsibility for paying off the debt on the land which totaled almost a quarter of a million dollars.

To discuss your NJ estate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Estate Administration Attorney

 

Previous PostNext Post