First, the mortgaged property can indeed be included in your estate plans. And in fact, it should be included no matter whether you want the home to be sold or kept by heirs. 

The only difference between a mortgaged home and any other asset in your estate plan is that the heirs must deal with the loan as well. You may make your own arrangements within the estate plan for managing the loan or you may choose to let your heirs make their own choices. 

Signing a mortgage contract only obligates the listed borrower(s). No one else, including heirs or family members who didn't sign the loan, must continue to make payments. If no one does make the payments, the property will simply go into standard foreclosure and the loan will end. 

However, when a borrower passes away, the heirs have a few choices about how to continue the loan. They (or your estate) may keep making payments while the house is put on the market. Some mortgages also allow an heir to take over the loan and keep the property. And heirs may always take out a new loan and pay off your mortgage, keeping the home. 

Do you have or plan to get a reverse mortgage? These special mortgage arrangements can be great for seniors because they shore up a retiree's finances through monthly income. But when the person passes away, that mortgage debt becomes due - usually all at once. This can be a surprise to heirs.

Generally, those who inherit property with a reverse mortgage sell the home and pay off the mortgage. They may also choose to refinance it in their own name(s), pay off the reverse mortgage, and keep the property. Anyone with a reverse mortgage should speak with their heirs about the mortgage and their options. 

One good way to ensure continuity within your estate is to place certain assets into a special entity designed just for them. Many people use a trust for their home, for example. You would create a trust with yourself as the trustee and a backup trustee. Transfer the real estate into the trust and make payments on the mortgage as normal.

When you pass on, the trust would continue to make the payments for as long as you have arranged. You could let heirs live in the home while the trust owns it or just use the trust to manage the home and mortgage during the transition. Other business entities - including an LLC or S Corporation - can also protect mortgaged real estate in similar ways. 

How can you ensure that your leveraged home doesn't become a burden to heirs or that they receive the full value of the asset? A common planning tool is a life insurance policy that remains in force as long as the mortgage does. When you pass away, the life insurance policy is used by your estate, trust, or heirs to pay off the remaining debt. You may also leave sufficient non-real estate assets to cover it. 

The best way to learn more about handling a mortgaged property is to consult with an experienced estate planning attorney in your state. You have many options, so seek out guidance to help you understand all of them. Kisner Law Firm has assisted California residents with all their estate planning needs for more than 40 years. Call today to get started on your own.