Trust, Will and Mortgage Responsibility

[Matt Kvalheim]

Hi Everyone,

I'm hoping someone here on Biggerpockets has some guidance on this for us. It's a little complicated, so I'll provide some background information.

My wife's parents own two homes, both right next to one another with similar appraised values. They live in one home, and my wife's brother and his family live in the other. They recently refinanced the home the brother lives in, taking out $100K in cash for the parents, leaving a $350K mortgage on the property for the son and his wife to pay (the son essentially wanted to buy the house, but could not qualify for mortgage without the parents). 

Everyone is on title and on the loan (my wife's parents, their son and his wife). The idea is that the brother will inherit the home when the parents pass, and the parents will leave the other home to my wife to inherit. They have a will and trust set up for this. So the son basically got his inheritance early, purchasing a home from the parents for $350K - a home that appraised for over $900K. 

However, now that the loan has closed, the brother and his wife want the parents to quit claim their names off title, but leave the parents still on the mortgage (there's obviously no way for them to be taken off the mortgage without a sale or refinance).

Our concern (my wife and I) is this - when the parents pass away, they will still be on the mortgage loan, but not on title. Does that mean that the trust estate will them be responsible to pay off their mortgage when the parents pass away?

Some more background: the brother and his wife lived in the home for 12 years without paying rent before the refinance. This contributed heavily to the parents going broke (they are in their mid 70's and their only savings was the equity in the two homes they own). The brother would not pay rent, nor would he move out when the parents needed money - he threatened that if they kicked him out, he would never let them see their grandkids again. The parents gave in, and refinanced the property, taking out a meager $100K for themselves (which I hope will last them), and added the brother and his wife to the title. The brother and his wife are paying the mortgage now.

In order to make it fair for my wife, they set up a trust and put the other home (the one they live in) into the trust for my wife to inherit when they pass away. It currently has a mortgage balance of about $250K, and we assume the trust will pay off the balance when the parents pass. Their will also stipulates that all other assets and debts will be paid through the trust and distributed evenly between the son and daughter, with the exception of the two homes - the home the parents live in will go to my wife, and their interest in the other home will go to the son.

So, we're concerned now that the trust will be responsible for paying off the mortgage of the son's house, since the parents will have quit claimed their interest in the property, but will still owe on the mortgage. Could this happen? Any suggestions on how to protect my wife's interests?

In case it is not clear here - the parents are relatively unsophisticated in these matters, and the son and his wife are extremely hostile to both the parents and my wife.

Thanks for any suggestions!