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What Happens To Your Mortgage When You Die?

If your parents' home has been paid off, your only obligation if you inherit the property is to pay the property taxes and homeowners insurance until you sell it. But what if your parents left you a mortgage balance along with the property?

While the mortgage is technically not yours unless you are a cosigner, if you don't make the mortgage payments or sell the house, your parent's lender can start foreclosure proceedings, says Jeff Cutter, a CPA and owner of Cutter Financial Group in Falmouth, Mass.

"The conversation about what will happen to the family home is an emotional one that lots of elderly parents don't want to initiate," says Guy Penn, principal and founder of G. M. Penn Wealth Management in O'Fallon, Mo. The time to discuss how to handle your parent's estate is before they pass away, no matter how difficult that conversation might be, says Penn.

Avoid probate

Mike Piershale, president of Piershale Financial Group in Crystal Lake, Ill., says the most important part of estate planning is to avoid probate so the inherited property can transition smoothly and inexpensively to the heirs.

In general, probate is the legal process by which your estate is administered and processed after you pass away. Specifically, it's the legal process of validating the will.

"It can take nine months to a year before [the] heirs own the house if it goes through probate," says Piershale. "Probate taxes can be 6 percent or more of the home's value."

4 property dispersal options

Here are four options to discuss with a financial advisor about how to handle an aging parent's estate before they pass away:

No. 1: Put the property in a trust. Piershale says the best solution for most homeowners is to put the home in a land trust or a revocable trust.

"If your only asset is your house, then a simple land trust will be enough," he says. "A land trust puts the property title into the name of the trust rather than your name. You establish beneficiaries and then when you pass away the property goes directly to your beneficiaries without going through probate."

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