Who is Responsible for My Debt After I Die?
Have you ever wondered what happens to your own debt or a parent’s debt after you (or they) die? Well, it depends, and it’s a key reason you want to ensure your estate plan is well prepared. How you handle your debt now will absolutely impact the people you love.
In some cases, you could inadvertently leave your surviving heirs — kids, parents, or others — responsible for your debt. If you structure your affairs properly, though, your debt could die right along with you.
Exactly what happens to your debt can vary, and if your affairs aren’t organized quite right, the debt will be paid out of your estate. This is a far from ideal situation for the people you love.
Probate (a court process) allows time for creditors to make a claim against a deceased’s person’s estate, in which case debts would be paid before beneficiaries receive their inheritance. Most people don’t realize your “estate” isn’t just what you own, it includes what you OWE, too. With good planning, I can help you align it in the way you want.
Debt After Death
After individual dies, a designated person (an executor) will handle his or her affairs. If someone has planned in advance, they would choose the executor. In the absence of planning, someone is appointed by the court. The executor opens the probate process, and the estate’s assets are used to pay any outstanding debt. This usually includes all of an individual’s assets, although it does not include assets with beneficiary designations, such as 401(k), 403(b), plans and insurance policies. The estate does not own these assets; they pass directly to the named beneficiaries. So, if an individual’s assets (including outstanding debt) are subject to probate, their beneficiaries will receive a smaller share of anything that was intended for them. Of course, you would want your heirs to receive as much as your estate as possible. Proper planning is critical.
How Unsecured Debts Are Handled After Death
In most instances, unsecured debt like credit card balances, are the last form of debt the estate repays. Secured debts, like car and mortgage loans, are taken care of first. Then come legal and administrative fees associated with executing the will. In some states, debts can be paid by forcing the sale of the deceased’s property. A reputable legal expert can help you understand the rules in your particular state.
Avoiding Probate
Establishing and maintaining a properly funded revocable living trust is a highly-recommended way to avoid probate. This means that the trust, not the estate, owns the assets.
Creating a living trust does not guarantee an individual’s assets will receive protection from creditors if that person has debt. But, it does mean his or her heirs may have more flexibility compared to probate. With a living trust, your trustee may be able to negotiate with creditors more easily to reduce any outstanding debt. Of course, every situation varies and creditors can still sue for full repayment of the debt. Suing for repayment could involve significant costs, and creditors might prefer to just settle instead.
When Do Surviving Family Members Pay the Deceased’s Debts?
Most of the time, surviving family members do not pay the deceased’s debt with their own money. Instead, debts are paid out of the deceased’s estate. If there is no estate, debts are extinguished. As with anything in life (and death), exceptions exist, including:
Co-signed loans or credit cards: Loans or credit cards co-signed with the deceased mean that the co-signer who is still alive is responsible for clearing any and all outstanding debt associated with that account.
Jointly owned property or bank accounts: The living party on the account with the deceased is responsible for clearing any and all outstanding balances.
Community property (property is any property jointly owned by a married couple): In some states, the surviving spouse is required to clear any outstanding debt associated with community property.
Healthcare costs: Some states require surviving family members, or the estate, to clear any debts associated with the deceased’s healthcare costs. Additionally, if the estate’s executor failed to follow a state’s probate laws, it might be necessary for him or her to pay fines for doing so.
Ensure Your Family Doesn’t Get Stuck With Your Debt
Effective estate planning involves taking care of your affairs. It’s one of the most thoughtful things you can do for those you will leave behind. You want to make sure your debts will be handled properly and that your family is not left with a big mess or inadvertently forced into court.
I Can Help.
As your Personal Family Lawyer®, I can evaluate your assets, assess your level of risk, and analyze your current insurance coverage to be sure you have the optimal level of umbrella coverage in place to safeguard your family’s wealth from today’s lawsuit-crazy culture. Contact me today to schedule your appointment.
