Legal Tip 244: Death Offset Accounts with Loans fully offset

I have encountered many people who tell me their house is paid off when it isn’t. It might have a fully offset loan against it, but it is still a debt owing and is not paid off.

This can have far-reaching estate planning consequences.


Example

Homer’s main residence is valued and $1mil and has a loan of $500,000 and $500,000 cash in the offset account and it is interest only. Homer says the house is paid off – but it is not paid off. It is just fully offset. Homer also has $1mil in cash in an ING account.

In Homer’s will says the House goes to Bart and $1mil goes to Lisa. His only children. (Maggie was sold to a circus earlier).

He figures they will each get an asset worth $1mil so all is fair.

Homer dies.

Bart gets the $1mil house, but it still has a loan of $500,000 which must be paid out by the loan it is secured by – meaning the recipient of the house cops it. Bart ends up with a $500,000 gift.

Lisa gets the $1mil cash in the ING account, as intended. But the wording of the will means she will also get the cash in the offset account on the loan that Homer had for Bart’s property.

Lisa ends up with $1.5mil in assets.

It doesn’t work out fair.


See also

Legal Tip 74: Loans Death and Inheritance Legal Tip 74: Loans Death and Inheritance

 

So this assumes the will is worded such that all cash goes go lisa, and can be mitigated by listing the offset and ing as separate assets?

 

Yes it can be overcome, by wording of the will. But the issue is most people don't know when they will die and may be moving money around to different accounts and even entities.

An offset may be full today but empty tomorrow.

Just another thing to consider before moving any cash and also allow for it at estate planning time.

 

Wouldnt Lisa get less ? The $500K debt must be repaid from the estate for a transfer to be effected. Transfer cant occur otherwise. Lisa gets $1.0m after this is paid. And Bart will only receive title, so he gets $1m in property. This is why an executor will only transfer benefits after the estate liabilities are discharged to ensure that Bart isnt disadvantaged and holds the executor liable for over-paying Lisa. But if the house is worth $975K then Bart only gets that title. Or if worth $1.1m he gets that.

CGT liabilities can be far less than clear as they attach to each inherited asset in whole or in part.

Bart inherits the house worth $1m but with a present CGT liability of $250,000 as its wasnt Homer's main residence at the time of his death or for year and years after his former career in nuclear power went offshore. Lisa inherits $1m cash.
What does the will say ? It may be silent. A asset gift may unfairly benefit one beneficiary v another. This is where clauses to equalise the estate distribution (ie 50% each) may be preferred v's allocation of what seems like equal assets.

 

If the will doesn't specify the loan must be paid out of the property it is secured by - not used for.
See s145 Conveyancing Act 1919 (NSW)

 

Nasty !

How in practice would that work ? How does s145(3) impact this ? Bart must apply for a loan to discharge the former loan before the executor will make transfer ? And if he refuses or is incapable and Bart allows the Bank to foreclose on the exectutor he eventually stands possessed of unencumbered property ?

 

Yes to transfer the property any mortgage must be discharged. This would mean either Bart has to borrow to pay out the existing loan or the property would need to be sold to pay out the loan and the leftovers can be distributed to Bart.

 

Do all states have similar provisions ? Imagine it could become a PI claim for the drafting of the will as defective if Bart takes offence to his understanding BUT proving Homer was not correctly advised may be difficult to prove.

 

No it varies from state to state.

 

How many lives as Homer got? You've done him over so many times

 

They are all different Homers!

 

Some inspiration
- Family Guy
- Star Wars
- Brady Bunch
- Gilligans Island
- Seinfeld
- South Park (esp when Kenny dies and leaves an inheritance)

 

Thanks for all the great posts @Terry_w. I am reading and following every single one with interest!

 

Friend got caught out by a will wording.

His stepfather had loaned him $500K. In his will the stepfather forgave the loan as friend’s share of the estate. Problem was that friend had previously repaid the loan, so got nothing! Not sure if he ever contested the will. .