This column first appeared in the San Antonio Express News and other Hearst Newspapers on October 8, 2019.
Dear Mr. Premack: My brother and his wife took a home equity loan, and then a few years later they divorced. He stayed with the house, and she was still on the loan after the divorce. He recently passed away with no Will. My former sister-in-law is now incapacitated after suffering a stroke. Their daughter is agent under her POA. Is the daughter able to refinance the Texas Home Equity Loan using the POA? Or would it have to be just a new Loan? – RC
Your focus on the loan is appropriate but is too narrow. The loan is only one of the problems that this situation presents. First, your brother died as an unmarried man with at least one child. He was intestate. He owns the house because of the divorce, and title to the house must be cleared via probate.
Let’s assume that the daughter you mention is an only child. Since her father died, unmarried and intestate, she is the heir to his house and other assets. However, according to Texas law she must go through a legal process to settle his estate. She cannot use a Small Estate Affidavit because his house is not her homestead and she is not a minor child. Consequently, she will need to hire experienced probate counsel to begin a complex legal proceeding.
Because he died without a Will, the proceeding will involve, first, proving that she is the legal heir to his estate. This portion is called a Determination of Heirship. It is held before a Judge who hears her story, receives an independent evaluation from a separate attorney appointed by the court, and decides exactly who is entitled to inherit under Texas law. If your brother had bothered to make a Will, this procedure would not be necessary because the Will would declare to whom he left his home and other assets. Failure to make a Will or other binding estate plan is an expensive mistake.
The second legal probate procedure is Administration of his estate. The court will appoint an Administrator who must report to the court and post bond (unless various laws can be invoked to simplify the process).
The Home Equity Loan is the next big issue, after probate. Part of the Administrator’s job is to settle any debts left by the Decedent, which would include handling the Home Equity Loan.
This is where the daughter and her mother (your brother’s ex-wife) have a conflict of interest. Mother is obligated to pay the debt because she signed the loan, and - as is typical after a divorce - was never released from liability. Consequently, daughter has a conflict of interest because 1) as Agent for mother, daughter owes mother a fiduciary duty to act in mother’s best interest, but 2) as Administrator of the estate, daughter owes the estate a fiduciary duty to act in the estate’s best interest. If daughter as legal heir wants to keep the house, someone has to make the loan payments. Daughter is not personally obligated to do so even if daughter owns the house; only the estate and the mother are obligated to make the loan payments.
How should they handle the Home Equity Loan? If daughter wants to keep the house, payments must be made. Ideally, daughter would take a new loan which then retires the loan on which her mother is liable. A refinance of the existing loan is not appropriate, because it would neither remove mother from the loan nor add daughter to the loan. Hence, daughter should not use mother’s POA as mother’s Agent to do a refinance. (And, as a new homeowner, daughter needs to be sure that she has her estate planning attorney draw a Will so the house can pass to her selected heirs if she were to die.)
If daughter has no desire to keep the house, then she may proceed as Administrator to sell the house. At the time of sale, the net proceeds will be used to pay off the Home Equity Loan, thus relieving mother of liability. Daughter will receive the balance of the home’s value after the loan is paid.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.Premack.com.