Consider this.
Let’s say, we have Tan.
Years ago, Tan bought his home for RM 800,000. Today, the property is worth as much as RM 1 million and Tan owes RM 600,000 in outstanding mortgage. Tan’s mortgage payment is RM 3,500 a month and his MRTA had already expired. As I write, Tan’s mortgage rate had risen acutely to 4.25% a year. Thus, he had made a recent decision to park RM 200,000 of his excess cash into his loan account so that he could save some interest costs.
As a result, Tan reduced his outstanding mortgage to RM 400,000. Also, Tan has lowered his cash reserves down to RM 25,000, where he uses it to pay bills.
Presently, Tan resides in his home with his mother, wife and a 5-year old son. As such, the key question is, ‘What could happen to Tan’s property if Tan passes on prematurely in the future?’.
1. Will Tan’s Wife Inherit His Property ‘Automatically’?
The answer is no.
Upon his death, Tan’s property shall be frozen and form parts of his estates.
If Tan has written a will, his property would be distributed to his beneficiaries in the will document. He could have nominated his wife to be the sole inheritor of the property. Or, he could have named his mother and wife to be the joint heirs to his property. Alternatively, he may leave behind his property to his son under a testamentary trust.
If Tan did not write a will, the ownership of his property would be distributed to his mother, wife and son under the ratio of 25%:25%:50% which is stated under the Distribution Act 1958.
So in short, Tan’s wife may not necessarily inherit Tan’s property automatically. I would say it all depends on Tan’s testacy upon his passing.
2. When Will Tan’s Beneficiaries Inherit the Property?
Tan’s bank shall hold onto the title deed of Tan’s property until its mortgage has been settled. This is because the distribution of the estate to Tan’s beneficiaries shall only proceed after Tan’s outstanding debts and taxes were settled in full. It is not possible for Tan’s loved ones to receive the title deed to Tan’s property, as long as the mortgage is not settled. So, the government and his creditors would have priority over Tan’s beneficiaries on Tan’s estates.
3. Will Tan’s Mortgage Payments be Discontinued?
The answer is no. Debts do not die with the deceased.
In Tan’s case, his outstanding mortgage is RM 400,000. Hence, Tan’s bank would require the mortgage installments (RM 3,500) to be paid promptly on time. The next important question is, ‘Who and how this payment is going to be made?’.
Well, could it be from Tan’s cash savings in his bank accounts?
The answer could be a yes, if Tan instructs his executor to do so in his will. But if Tan passed away without a will, Tan’s beneficiaries would need to choose either one or a few representatives to be the administrator(s) of his estates. Then, the administrator(s) could use Tan’s savings to service Tan’s mortgage installments.
In both cases, the appointment of an executor or administrator(s) will take time as it requires court proceedings. Meanwhile, the bank expects payments for his
mortgage. During the period, it is possible for Tan’s family members to continue the servicing of Tan’s mortgage installments from:
a. Proceeds of Tan’s Life Insurance Policies.
b. Proceeds of Tan’s EPF Account.
c. Cash proceeds from Tan’s family trust, if he has established one.
d. Their Own Pockets.
But, what if Tan’s family members fail to continue his mortgage payments?
Tan’s bank shall view such failure as a loan default. If the situation prolongs, the bank could auction Tan’s home off to recoup its loan principal, resulting in Tan’s family members losing this property (their home). If at that time, the property’s valuation is RM 1+ million, that shall be the amount of financial loss incurred by Tan’s family members.
4. Can This Property be Sold Off to Avoid a Potential Loan Default?
The answer is yes.
If Tan had a will, his executor shall have the rights to administer the property. In the event where Tan passed away without a will, this right to administer estates shall be granted to an administrator (chosen by Tan’s beneficiaries).
Thus, if the executor or administrator and his beneficiaries struggle to meet the mortgage payments, they can sell off the property to avoid a loan default.
But it is undesirable. This is because the sale of the property could be made out of desperation. Instead of fair valuation, the property could be sold at a bargain and this could mean 5-or-6 figures in financial loss to Tan’s beneficiaries.
5. What Can Tan Do to Keep His Property Upon Death?
There are a couple of things that Tan could consider:
1. Decide on his beneficiaries and state them in his will document.
2. Ensure that his taxes and debts can be settled in full, by his insurance policies or his financial assets such as EPF and other forms of liquidable assets.
3. Set up a family trust and nominate himself and his beneficiaries to inherit cash in the event of an emergency, which includes death.
All these can be planned out and executed efficiently, with the help of an estate planner or a financial planner. If Tan is able to do the two above, he would have eliminated countless of financial ambiguity, conflicts, losses and headaches that may arise from the administration of his property.
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