The mortgage business is booming in many parts of the country with historically low interest rates. However, one often overlooked consideration is the impact that refinancing your home could have on your estate plan.
Most of the effect of a refinance on an estate plan will depend on the following factors:
1. How the property is titled;
2. What is the expected new equity value of the real property at the applicable death;
3. Whether the property is the homestead of the grantor.
How You Own Your Property
If your name is the only name on the deed to the property, a refi will likely have no immediate effect on estate plan. The value will be the net equity at the time of your death. Your Last Will and Testament (or the state’s intestacy law) controls who will receive the property at your death. For residential property (note that not all properties qualify), the federal Garn-St. Germain Act (the “Act”) mostly prohibits a lender from requiring that their loan be paid off at your death. Your heirs who have a certain degree of family relationship will be allowed to own the property subject to the mortgage and loan balance, provided they continue to pay all property and loan expenses.
Even if you own property with a spouse or other person as joint tenants with rights of survivorship, under a life estate deed or even in a Trust, at your death title vests without probate in that joint owner, beneficiary or remainderman, and for properties covered by the Act, that new owner can continue as the new borrower.
Property Owned in a Trust
Problems can arise when people refinance property titled in the name of a Trustee of a trust. Lenders are reluctant to have a Trustee as a borrower. To accommodate this, a lender will require that the Trustee change the ownership of the property from the trust back to the Grantor. After the loan is closed, the Grantor is then able to transfer the property from the Grantor back into the Trustee. Unfortunately, the retitling of the property back to the Trustee is often forgotten.
This forgotten re-transfer will likely result in a probate administration at the death of the Grantor which will result in added expense and delay in conveying title to the heirs.
Titling Problems Between Spouses
And then there are the problems that can also arise during the refinancing process if a property is owned by only one spouse. This typically occurs in a second marriage with the spouses desiring to maintain their separate property. If the spouse who owns the home wants to refinance, the owner, the lender and the closing agent must have clear communications of the titling and mortgage requirements. A lender should allow the non-owning spouse to “join in” the mortgage (without being a borrower), or they may require that the spouse be added to title. That could result in the disinheritance of the intended heirs of the owning spouse, at least with respect to that property.
Care must also be taken to consider the homestead laws in Florida giving spouses rights of inheritance as to homestead. If those rights are to be waived, there is specific documentation that must be prepared.
Many times people choose to leave specific assets, such as a house, to specific beneficiaries, such as a caregiver child. When that property is refinanced, the equity value of the house may decrease leaving the inheritance to that specific beneficiary of possibly lesser value than anticipated. Therefore, at the time of a refinance, the overall estate plan should be reviewed to make sure that the distribution intentions of the owner as to all beneficiaries are still accomplished.
Understanding what can go wrong is the first step in making sure that nothing goes wrong. If you are planning to refinance a property, make sure you consult with your estate planning attorney and consider how the refinance might affect your distribution intentions. Mistakes made in the refinancing process are often found too late to be fixed.
Chris Caswell, Esq.,firstname.lastname@example.org
Berlin Patten Ebling, PLLC
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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