If you inherit property, you should of course be grateful and count your blessings. Consider, however, the possibility that the gift may come with a big string attached—a debt linked to the property, such as is very common with real estate or a car.  In such an event, the question arises as to whether the debt must be satisfied from the particular asset or from the decedent’s estate more generally.  How this question is answered can cause a drastic difference in the amounts that beneficiaries receive from an estate.

Historically, the law presumed that the debt was not to be paid from the property that was connected to it.  The reasoning for this was that a true gift should not come laden with such a burden.  Over time, however, as mortgage debt became more commonplace, this thinking changed and statutes flipped the conventional assumption.  Increasingly, the law came to the view that property left to someone includes the debt on such property, unless the decedent clearly indicated a different intent in his or her will.  

This is where careful estate planning, with professional legal guidance, comes in.  It is best to use carefully-crafted specific language in a will so that readers of the will can be certain of its interpretation.  A general directive in the will to pay all debts of the testator is probably not sufficiently clear enough to avoid conflict related to debts of a decedent.  Instead, if one’s intent is have the estate pay the debt on an asset, language something like this should be used in a will: “If [the specific asset] is subject to a mortgage, security interest, or other lien, I direct that my executor pay the debt from other property of my estate which is not given to a specific person or entity.”

Consider this example of how such language can avoid later problems: a farmer left to his (favored?) son three different farms, 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 to the farms, 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 farms to come from the farms themselves. The father’s will directed in a general way that debts were to be paid from the estate. However, under the relevant state statute, such a general direction was not sufficiently explicit to satisfy the debts on the farms from the residuary estate.  Therefore, the court found that the will had not clearly shown an intent that the first son was to receive the farms debt‑free, and as a result, the first son got the three farms, but also the responsibility for paying off the attached debt.

The safest way to assure that your intentions will be correctly stated in your will, and that your beneficiaries will receive their inheritance without conflict or confusion, is to obtain the advice of an attorney in the preparation of your estate planning.  Such advice is not expensive, and can provide significant savings in both money and good will in the long run.   If you need assistance with your will or estate planning, call CGA Law Firm and ask to speak with one of our estate planning attorneys.  You and your family will be glad that you did. 

Attorney Timothy J. Bupp practices in the estate planning and real estate groups at CGA Law Firm.