Q: Dear Mr. Jones; I read your column in the Daily Republic. Here is my situation. I was involved in a foreclosure in 2009. That same year I purchased a foreclosed home with my parents’ assistance. My parents provided the cash for the purchase. I am the titled registered owner and my parents are my banker. They hold a registered promissory note (sorry, I’m probably not using the correct legal terms). I pay them according to the promissory note, an interest only loan, a payment each month and I maintain the property, all taxed etc. Okay, my question. My parents are getting up in years. They live in another state. I want to make sure everything goes smoothly at the time of their death (nothing immediate) with my ownership of the property, taxes etc. We are operating under the hopeful and possibly delusional impression I just need to tear up the promissory note at that time. What do you think? Please advise. Thank you.
A: By “registered” promissory note I’ll assume you mean “recorded” note. If the transaction was done properly, like by the escrow company, there is a recorded deed of trust that serves as your parents’ lien on the property.
The term “deed of trust” is a misnomer. It’s not really a deed, it’s a lien. Personally, I’d like to hog tie and shoot the bum that came up with the term because it has caused nothing but confusion for my clients throughout the decades I’ve been in the real estate game.
Regardless, it’s only a lien.
The reason I bring it up is because you need to understand that we are talking about two different, though related, things.
If you bought the house the real deed is recorded in your name. In other words, you own it. It’s just that you have a lien on it.
So if your parents pass away, you still own it. Nothing changes.
The lien, on the other hand, can be a problem.
For a second let’s step back and pretend your parents lent the money to a stranger so he could buy a house and pay your parents back with interest. It was an investment.
When your parents die that note, or I Owe You, is considered an asset of the estate. The stranger would have to keep making payments and the profit from those payments would be distributed according to your parents’ will or trust. Or if they died with neither one, under the rules of the state.
It’s no different just because they lent the money to their daughter.
You didn’t mention if you had brothers and/or sisters. Or for that matter if there’s anyone else who would be a beneficiary of your parents’ estate.
For the sake of argument, let’s presume you have three brothers. Let’s make them younger brothers, an oldest daughter’s worse nightmare.
Your parents have now passed away. Absent a will by your parents to the contrary, each of your three little brat brothers are entitled to one-quarter of each of your house payments since it’s their share of their inheritance. There may be a problem getting them to give it up.
And then there’s the problem of the deed of trust, meaning the lien.
The lien doesn’t fly out of the Recorder’s office’s files just because the person who held the lien dies.
The way a lien is removed from a property is through another document called a “reconveyance deed.” It’s not exactly a deed either. It’s more like an anti-lien.
When a homeowner pays off their mortgage they receive a reconveyance deed from the bank which, as soon as it’s recorded, removes the effect of the deed of trust. So the lien goes away.
In other words; just tearing up the note creates more problems than it solves.
If your parents want your debt to them to go away upon their death they should make an estate plan, either a will or a trust, that explicitly says so.
The issuance of the reconveyance deed can take place either in a probate if there’s a will, or during the trust administration.
There are some other creative ways to deal with the future problem now, but nothing makes more sense than just asking your parents to see someone about drafting their estate plan.
That way there’s no confusion with your three little brothers and you can all still have Thanksgiving dinner together every year at your house.
Hint: Don’t expect them to hang around and clean up.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you can contact him at [email protected].