Estate Planning When Debt is Involved

April 15, 2008 | Roger McEowen


When a specific bequest of property is made to a particular person and the property involved is subject to indebtedness, special care may be necessary to ensure that the decedent’s wishes are carried out.  How that debt is treated upon the decedent’s death can impact both the recipient of the property and the residuary beneficiaries of the estate.  If, for example, the decedent wants the recipient of the property to receive it debt-free (which is often the case), then the estate will have to pay off the debt with other estate assets.  But, that will likely decrease the assets that remain for the other (residuary) beneficiaries of the estate.  Conversely, if the property passes without the debt being paid off, the net amount passing to the residuary beneficiaries is increased.  So, consideration must be given to these issues as they impact the overall estate and business plan.

Iowa law specifies that when property subject to indebtedness is specifically devised, the devisee takes the property subject to the indebtedness unless the decedent’s will (or other testamentary instrument) either specifically states (or implies) that the indebtedness is to be paid-off. See Iowa Code §633.278. Other states, including Florida, have similar statutes, and a recent opinion of the Florida Court of Appeals illustrates how courts construe such statutory language.

In the case, the decedent left three family farms to one of his sons.  At the time of death, the farms had over $240,000 of debt on them.  The decedent’s remaining property was to pass among five beneficiaries, including the son who got the farms.  The decedent’s will did not specify whether the farm debt should be paid off by the estate, but it did state that all of the decedent’s legal debts should be paid.  While the estate was being administered, the estate paid the farmland debt.  That meant that the son got the farms debt-free.  But, one of the other estate beneficiaries sued on the basis that their share of the inheritance had been reduced in an unauthorized manner.  The Florida statute is a bit more to the point than the Iowa statute mentioned above and states as follows:  “[t]he specific devise of any encumbered property shall be entitled to have the encumbrance on devised property paid at the expense of the residue of the estate only when the will shows that intent” and “[a] general direction in the will to pay debts does not show that intent.”  Fla. Stat. §733.803.  Based on the statute, the court held that the estate’s payment of the debt was improper.  

Clearly, when debt may be involved with estate property, it’s best to determine what the decedent-to-be wants to do in light of what best fits with the overall estate and business plan.  If necessary, specific provision in the will (or other testamentary instrument) may be required – whether the decedent intends to have the debt paid-off or not.  That way, all of the decedent’s heirs will have the correct understanding of what the decedent intended.  In re Estate of Woodward, No. 2D07-713, 2008 Fla. App. LEXIS 5182 (Fla. Ct. App. Apr. 9, 2008).