Plan could stick son with mom’s debt

Ilyce Glink and Samuel Tamkin

Q: My husband and his mother are taking out a mortgage together and putting the house into a trust, naming themselves as the trustees and all the siblings as the beneficiaries.

In the process of acquiring this mortgage, we learned that my mother-in-law has more credit-card debt than expected. I am under the impression that, upon her passing, the house will have to be used to pay off any outstanding debts she might have before it can pass through the estate to her children, even though my husband will technically co-own the home with her.

Is this true? If so, we will likely bow out of the agreement. Is there another legal way to take over her home and mortgage without being subject to taxes in the end?

A: It's nice that you and your husband are willing and able to help your mother-inlaw. We see three important issues, however, that should be addressed: First, whether your husband should take out a loan to help out his mother; next, whether your husband should be on the title to the home, either directly or through the trust; and, last, whether your mother-in-law's credit-card debt will affect her estate when she dies.

Let's start with the last issue first. When a person dies with debt, the person handling the estate (the executor) is obligated to pay off those debts from the assets owned by the estate.

Let's say your mother-inlaw dies and has $20,000 in credit-card debt. The executor of her estate is obligated to use funds to pay off those debts from any cash she had left in her bank accounts or from the sale of any assets she might have owned.

On the issue of taking out a new loan and having your husband be on the title with your mother-in-law, he would be taking on an obligation to pay a debt she owes.

Let's assume that today your husband is debt-free. When he signs on the dotted line with his mother, he will be responsible for the mortgage loan payments whether his mother contributes to those or not. At the same time, however, he will be a part owner of the home.

Lastly, it's noble of the two of you to help out your mother-in-law so long as your intent is not to avoid having to pay off her debts. The transfer of the home into the trust might end up depriving her creditors of money they otherwise would have received at the time of her death.

If the trust is structured in a way that upon her death the home automatically transfers to your husband, then the property would not go through probate because, at the time of her death, the home would no longer be part of her estate. As such, the home would not need to be sold to satisfy the debts of your mother-in-law.

But the creditors could claim that the transfer of the home into the trust was used to avoid having to pay them the amount they were owed. They would have up to two years from the time the home was put into the trust to make that claim; so if your mother-in-law is quite ill now, and you are doing this to avoid paying them off, you could have issues.

If, on the other hand, your plan is for estate-planning purposes, your mother-inlaw is paying her debts, has other assets and it doesn't seem as if you are undertaking the transfer to deprive creditors of what they might be entitled to get to satisfy her debt, you should be fine.

If your husband is working with an attorney to put the property into a trust, he should discuss the issues relating to his mom's creditors.