Estate Matters… Matter
While it may not seem like it at the time, a private mortgage loan can become a sticky estate issue down the road. That's why it's essential for a relative to consult his tax, estate, or financial planner before making or taking such a loan.
A lender with a large loan outstanding at the time of death may leave less of an inheritance for other family members, and jealousy between siblings or other family members can cause problems in the settlement of the estate — particularly if the loan was not disclosed to other family members beforehand.
It really makes sense to enlist an attorney to take the extra step of legally securing the note with the residence. You need a lawyer to do this; otherwise, the borrower can't take advantage of the mortgage interest tax deduction. Without a formal note, it's going to be pretty tough to appease the IRS if you're audited.
Lenders and borrowers need to address insurance issues that could secure payment of the loan if the borrower dies. Based on the individual financial circumstances of the lender or borrower, experts may see certain pitfalls and advantages that both parties may not.
