Who Pays the Mortgage on Inherited Real Estate

Suppose you inherit the family home from your parents. They took out a mortgage on it to pay for some wheelchair access ramps and stair lifts. Do you have to pay the mortgage? It depends.

Mom has left a widow and when she passes away she leaves a will with a section devising the house to you, her oldest and most helpful son. There was also a provision in the will that addresses payment of Mom’s debts by her executor out of her estate. Typically, such a provision states, “I direct my Personal Representative to pay all debts and claims which are legally enforceable against me.” This sounds like the residue of the estate will pay all debts of the decedent before distribution.

So, that should mean that Mom’s estate will pay the mortgage off before transferring the home to you, right?

Probably not. But it depends. If the will makes it clear that the devise is to carry the mortgage with it or not carry the mortgage with it, then the will is clear. If the will says you take subject to the mortgage, you get the debt. If the will says the executor should pay off the mortgage, you get the house free and clear. The intent of the testator always trumps the default position of state law.
But what if the will doesn’t say anything specifically abut the mortgage on the home? If there is no further limitation on payment of debts, then the law of the state that governs the interpretation of Mom’s will at death determines whether the estate must pay off the mortgage.

In the common law, there is a concept called the “principle of exoneration”, a relic of the nineteenth century that survives in some states today. This principle states that encumbrances on real estate are exonerated, that is, paid by the estate, before transfer, barring words to the contrary in the will.
More states than not have enacted laws that assume otherwise; that is, that devisees get the debt as well as the real estate, that the real estate is not exonerated from the debt.

Pennsylvania is one of many states, including Ohio, New York and Florida, where the state law provides that, barring any contrary provision in the will, the beneficiary gets the burden of the debt as well as the real estate. Tennessee, Georgia, and West Virginia go the other way. The Pennsylvania statute, 20 Pa.C.S. A. 2514 (12.1) states that:

A specific devise or bequest of real or personal property passes that property subject to any security interest therein existing at the date of the testator’s death, without any right of exoneration out of any other estate of the testator regardless whether the security interest was created by the testator or by a previous owner and any general directive in the will to pay debts.

So, if your will is interpreted according to the law of a state that overrides the principle of exoneration, the real property comes to the beneficiary with any lien or mortgage against it. But suppose you have your will drawn up in Pennsylvania and retire to Tennessee. It could be that Tennessee law prevails and the estate has to foot the bill for the mortgage before distribution of the real estate to you. That is another complicated question of which state’s law should govern – for another time and book.

How do you avoid an outcome you never intended? Most people want the encumbrance to be packaged with the real estate rather than making every beneficiary pay part of a mortgage on a property.

Suppose the Section on debts had instead been written this way. “I direct my Personal Representative to pay all debts and claims which are legally enforceable against me, except that all mortgages, liens, and other encumbrances on property owned by me at the time of my death shall be a charge on the property so encumbered, and my estate shall not be liable for any such indebtedness.”

This removes all doubt as to Mom’s intent. Alternately it could have been written to include all mortgages, etc, instead of excepting them, if that was Mom’s intent.

The key is to address mortgages, either in the devise of the real estate or in the debt section of a will and not let the default state law govern. This is another reason why you need a lawyer to draft your will, not an internet form service.