It is unfortunately all too common these days that a house or other asset is worth less than the mortgage owed on it. What happens if the owner dies, leaving the upside down asset to a spouse or children?
There’s good news and bad news. The good news is that the heirs of the deceased can still inherit title to the asset via probate (if it is held in the deceased’s name) or via a deed from the successor trustee (if it is held by a trust). The bad news is the lender will not simply allow the heirs to make payments on the same mortgage. The lender’s agreement to loan was with the deceased, based on his or her credit history and income. Any heir would have to pay off the debt or obtain a new loan; and the trouble is, of course, that a lender will not want to lend more than the asset is worth.
Is there a solution? If the asset is significantly over-encumbered, it doesn’t make sense to bother transferring title to the heir. Instead, you can just allow the asset to be foreclosed upon or repossessed. If the asset has some sentimental value and is not significantly over-encumbered, you can pay off the debt, or pay it down to an acceptable level and borrow the rest—if your credit is good and you are able to get a loan. I had a client whose mother died, leaving a luxury car worth about $39,000 with a debt of $42,000. My client was herself wealthy and decided simply to pay off the debt and take title to the car. Not many people can afford to do this, however.
If you are confronting this issue, you should contact a qualified Nevada probate attorney.
By Sharon M. Parker
Most wills and trusts contain a provision that says something like this: “If any beneficiary hereunder shall attack this last will and testament, such beneficiary’s share shall be thereby revoked and such beneficiary shall receive nothing” or “If anyone shall challenge this document, I leave such person $1.00.” This type of clause is known as a “no contest” or “in terrorem” clause; the latter is Latin meaning to frighten someone. In other words, the person making the will or trust includes this clause in order to scare beneficiaries or would-be beneficiaries from initiating a legal challenge or contest to the will or trust.
Are no contest clauses actually enforceable? In Nevada, they are enforceable, but with some significant caveats. First, no heir will be disinherited for asking a court to enforce the terms of the will, or enforcing that person’s legal rights under the will or trust. Moreover, it is perfectly legitimate for an heir to petition the court for instructions with respect to how the will should be interpreted. Second, regardless of the no contest clause, an heir who, in good faith, has probable cause to believe that the will was invalid, may bring an action challenging the will without fear of being disinherited, provided that he or she meets the standards set forth in Nevada’s probate code.
Does this defeat the intention of the person who made the will? Hopefully not. No contest clauses are designed to threaten family members who got less than their “fair” share—for example, where someone is intentionally omitted or got less than his brothers or sisters. The trouble is that if no one could legally challenge a will without being disinherited, then many families would be out of luck in situations involving undue influence. For example, a caretaker or perhaps a girlfriend or recently acquired spouse may unduly influence a sick or dying person, swaying or even coercing the susceptible testator to execute a will leaving nothing to family members. Nevada’s law on no contest clauses is intended to balance the interests of those who are of sound mind and memory and want to give uneven shares to their family members with the interests of those who are sick and susceptible to undue influence when they execute their wills.
If you have questions, you should contact a qualified Nevada probate attorney.
By Sharon M. Parker, Esq.