Settling an Estate with a Private Mortgage Note

Understanding the Estate Process

Dealing with paperwork after losing someone you love can be intensely stressful. Emotions are running high while administrative duties such as funeral arrangements and wills need to be handled.

What Is an Estate?

An estate is made up of everything owned by a person who has died. This includes:

• Money in cash form and in an account
• Money paid out from a life insurance policy
• Stocks, bonds and other financial assets
• Real estate and mortgage notes
• Personal possessions such as vehicles, furniture, art and jewelry
• Any debt the deceased owes creditors or people

Who Divides an Estate?

When a person passes, his or her estate must be pushed through probate by an executor. The process involves settling debts and transferring assets, which typically are indicated by the deceased’s will. Probate includes the legal process in which a will is examined by the court and proved valid or invalid.

A key person in the probate process is the will’s executor, the person the deceased chose to carry out the will. This person handles the legal legwork of getting the will officially fulfilled. Typically the executor is the surviving spouse or a child of the deceased.

The Probate Process

1. A petition is filed in probate court.

   The executor of the will is responsible for starting the probate process by filing the will in a courthouse within the county where the deceased lived. The petition is the formal presentation of the will to the court.

2. The executor of the will takes inventory and gives notice to creditors.

   The executor gives written notice to all creditors of the estate. This process depends heavily on state law. The executor then creates a written inventory of all of the deceased’s assets, including real estate, promissory notes, stocks, bonds and other valuable possessions.

3. Estate and funeral expenses, as well as debts and taxes, are paid from the estate.

   The executor determines which creditors’ claims on the estate are valid and pays them. If there is not enough cash to do so, the executor is often allowed to sell assets held within the estate to pay the debt. During this step, funeral expenses are settled through funds held in the estate.

4. Final assets are transferred.

   Once the state-determined time period for creditors to make a claim has passed, the probate process moves into the next step. The executor then petitions the court to transfer the assets as indicated by the will. Once this petition is approved by the court, the executor then can transfer deeds, stocks and liquidate other assets to get them to the intended recipients.

Private Mortgage Notes in an Estate

Some wills contain private mortgage notes that need to be transferred to the intended recipients according to the directions of the will.

For some executors, it will be as easy as notifying the servicing company handling the mortgage note about the transfer of the asset. However, other situations can require you to liquidate the asset.

If you need to cash out the mortgage note to best fulfill the terms of the will, here are the steps to prepare you:

1. Gather all pertinent information on the note: How much remains on the note, who the borrowers are and whether there is a servicing company. This will help determine the value of the mortgage note.
2. Collect all the necessary documents, which include:
   Copy of the promissory note
   Copy of the mortgage, deed of trust or land contract
   Copy of closing statement
3. Speak with a mortgage note purchasing company to obtain a quote.

Once you have a quote, you’ll be able to execute under the following conditions:

• To pay off creditors making claims on the estate
• Dividing the asset among multiple inheritors
• The need to mitigate future risk on the asset

Paying off Estate Creditor and Tax Claims During Probate

During the third step in the probate process, the executor may find there is not enough cash on hand to pay immediate claims on the estate, such as those from taxes, creditors or funeral expenses.

In this situation, the executor can sell a private mortgage note within the estate to cover these expenses. Often, a private mortgage note is the ideal asset to liquidate in this situation: It doesn’t have the growth potential of stocks and bonds, so you’re not losing potential capital down the road. It’s also quicker to sell a private mortgage note than an actual piece of real estate, as the process can be resolved in a matter of weeks.

Dividing the Asset Among Multiple Inheritors

During the fourth step in the process, the executor may find that the note is being given to multiple heirs, such as siblings. In this case, it may become necessary to cash out the note, but not always.

The executor should have a conversation with all of the heirs to find out their goals with the money. Often, most will prefer cash in hand that they can control; however, sometimes an heir may want a long-term payment stream.

In this case, a portion of the note can be sold on behalf of the heir who wants the cash, while the remaining portion can go to the heir desiring a payment stream.

Mitigate Future Risk

Even when the note goes to only one heir, the new note holder may rather have the capital than manage the note. In the event the property owner fails to pay, it costs the note holder several thousands of dollars to foreclose on the property that acts as collateral on the loan.

Though the original note holder may have had the financial means to handle the legal fees associated with foreclosing, the new holder may not want the risk because they lack money to actually foreclose.