Mortgages In Estate Planning
It is common for a client to leave all of their worldly possessions to a specific set of individuals in equal shares. It is also somewhat common for a client to want to leave a specific piece of real estate to one individual while splitting the remaining assets. This latter situation is one in which it is critical to understand the concept of exoneration and how it was changed by Maryland Estates & Trust 4-405 and similar statutes in other states.
Historically, at common law (that is, Judge made law), a devisee (recipient) of real estate would be entitled to receive real estate free from mortgages, liens, and other encumbrances. This would alter the disposition of assets if one party were set to receive a piece of real estate where the mortgage on the real estate was forcibly satisfied from cash on hand that otherwise would have been given to other legatees.
As explained in Caruthers v. Buscher, 38 Md. App. 661 (1978), Maryland Estates and Trust § 4-405 altered the common law. Unless the will provides otherwise, the recipient of real estate takes it subject to any mortgage or lien that existed at the time of execution of the will but would be entitled to have a lien or mortgage satisfied if the lien or mortgage came into being (attached) to the real estate after the will was signed.
When a property is devised (whether by will or intestacy) subject to a mortgage, the recipient often has protections under the federal Garn-St. Germain Act. See 12 U.S.C. § 1701j-3(d).
Estate planning attorneys must ensure that a testator (the person making a will) understands how a mortgage may skew distribution of an estate.