WHAT IS Exoneration

Exoneration means to free someone from blame or guilt; in the financial realm, exoneration usually means to relieve someone of a financial obligation or duty. This can apply in many different areas of finance, such as taxation or mortgages.

BREAKING DOWN Exoneration

An important application of exoneration occurs in the settling of wills and estates. The common law “doctrine of exoneration” says that encumbrances, such as mortgages, of property conveyed must be paid off by funds from the estate, not separately by the person who inherited the property. In other words, the new property owner is exonerated from the debts, which are the responsibility of the estate.

Why Exoneration Matters

The concept has significant ramifications when multiple parties inherit various portions of an estate. Say a widow dies and leaves her estate to her three sons. According to the will, one son gets her house and the other two divide cash savings. But there is a mortgage on the house that must be paid off upon the death of the mother. Under the doctrine of exoneration, the son who inherits the house is exonerated from paying off the mortgage by himself; instead, it must be paid off equally by the three sons, out of the total value of the estate.

At least nineteen states have abrogated the doctrine of exoneration in favor of the Uniform Probate Code (UPC), which assumes that mortgages and other encumbrances are owed by the inheritor of the property unless the will specifies otherwise. This is called “default non-exoneration” and applies even if the will makes vague reference to paying off all debts. To qualify for exoneration the will must specifically state that debts on the property in question are to be paid off from the estate.

Exoneration After the Mortgage Crisis

Another form of financial exoneration made the news after the subprime mortgage crisis of 2008. To help struggling homeowners carrying mortgages that exceeded the value of their homes, the federal government instituted various financial aid initiatives to provide relief. Under programs combining government subsidies and incentives to private lenders, delinquent mortgage holders could be exonerated of their current obligations and reassigned new ones that they could manage more easily. The exoneration programs were credited with calming financial markets and restoring the economy, but they were also criticized as bailouts to irresponsible borrowers. Supporters of the exonerations countered that the banks themselves showed poor judgment in issuing high-risk loans.

In the realm of taxes, a taxpayer who convinces the IRS that they do not owe assessed taxes is also exonerated from paying those taxes.