If the heir brought the defaulted amount current and put the house back into the trust that the decedent took out for a reverse mortgage, will the heir be responsible for the balance and the 1099-C if he short sale the house?
2 Answers from Attorneys
Why would the heir pay money to make the mortgage current and then short sell the house? Seems like a losing proposition to me.
Based on what you have written, the house is now in the name of the decedent. There is a mortgage on the property and it is in default. Why not just let the bank foreclose, especially if the property is worth less than the mortgage? If the bank forecloses, there are no tax issues in 2013. Even if there were, the decedent's estate would be responsible, not the beneficiaries.
If the heir did as you proposed, no, the trust would be responsible for the 1099-C and any taxes. The beneficiaries only receive the property or assets left over after taxes.
Nobody become personally liable for a loan unless both the individual and the lender agree. The property, however, will remain subject to the encumbrance of the reverse mortgage, and someone must pay it or else the lender will foreclose.