How would gifting property affect my children's inheritance if I die before the mortgage is paid?

Full question:

Hello. I anticipate taking out a mortgage on a property I own wholly, through my mother who named me sole owner in a Life Estate. My mother deceased in 2006. This property is and would continue to be my legal residence. I'm concerned about taking out a fixed-rate mortgage at my age of 67 to gift my only sibling, aged 69, half of the property's value. She is already named in my will to receive half its value upon my death. But I wish to gift her half of the property's value now. My four children are named in my will as the other half-inheritors. If I now remove my sister's name from my will, how would my children's inheritance be affected should I decease prior to the satisfaction of a 15-year mortgage?

• Category: Real Property
• Subcategory: Mortgage Satisfaction
• Date: 04/07/2025
• State: New York

Answer:

Removing your sister as a beneficiary in your will means your children would inherit the estate solely. How your mortgage affects your heirs depends on whether the property is jointly owned or specified in the will. A mortgage secures the loan with the property, creating a lien that the bank can enforce. If you pass away with an outstanding mortgage, your estate must settle debts before distributing assets. If your children inherit the property, they would also inherit the mortgage debt. They can either pay off the mortgage, refinance, or have the bank transfer the mortgage to them, which is similar to taking out a new mortgage. Debts must be paid from the estate before any assets are distributed. If there aren’t enough assets to cover debts, the estate is divided among beneficiaries, with secured creditors being prioritized. Children generally do not inherit a parent’s debts unless they are co-signers or joint account holders. In community property states, spouses may be liable for certain debts incurred during the marriage, but this varies by state law.