However, there is much varied opinion as to the degree to which banks/lien holders try to prevent this by exercising the due on sale clause of the loan and on how difficult it may be to find insurance.

When you pay off your mortgage with a HELOC the bank that gives your the line of credit becomes the new lien holder.

Once you have the deed in hand you sign over all rights (voluntarily) naming the LLC as the new deed holder.

Maybe I am missing something but given a situation like this, how does the mortgage holder just get wiped out?

And the lien holders are trying to re-coup some of their cost on the next schmo.

Problem solved.If there are any junior liens, a short sale could be a problem as the lien holders may deny the short sale.

Yes Basically the new note owner becomes the mortgage holder if the property is serving as collateral for the loan.

The life estate holder was was 86 and looked like she had a year to live.

Some first lenders allowa second mortgage holder to assume the first in some cases, you can check on the before you make the loan.If you do any adjustable rate you may be required to have a floor and ceiling and a margin as we do.

I do not think the decision to accept a short sale would belong to the owner but to the mortgage holder.