For most of us, debt is a way of life. We finance our cars and homes, we use our credit cards to pay for holiday gifts and vacations. We borrow money to send our kids to college. Even if we use credit wisely, we still may end up with a pile of debt at the end of our lives.
So who is responsible for paying it?
That depends on the situation.
- If you die with no assets, and all of your credit accounts were solely owned, your creditors have nothing to collect from. Your debt dies with you
- If, however, you and your spouse were co-owners of your credit card accounts, he or she would still be responsible for paying the bills after your death.
Your debts have to be paid off before distribution of your estate to your heirs. Say at the time of your death you have $30,000 in solely owned credit card debt and $20,000 in your individual checking account. The credit card companies would get the $20,000 and your beneficiaries would get nothing. But at least they are not on the hook for the rest of the bill.
What if you owned a home at the time of your death? Here are a few scenarios of how things might play out:
- If you owned a home jointly with your spouse, it would automatically pass to him or her upon your death.
- If you were the sole owner, and your liquid assets weren’t adequate to cover your debts, your executor would have to sell the home to satisfy creditors’ claims on the estate.
- If you were still making mortgage payments at the time of your death, the bank or banks involved would have first dibs unless your heirs took over the loans, which is not always possible or desirable – especially if the value of the house is less than the mortgage.
What about student loans?
Federal student loans are canceled when the borrower dies. Some private lenders follow this course, but others can legitimately make a claim against the co-signor, usually a parent.
The key consideration regarding debt is ownership: is it jointly owned? Solely owned? Is there a co-signor?
Most of us would like to have enough money to last as long as we do, and maybe have something left for a legacy. Our best advice is to stay out of debt as much as possible, and be aware of the impact debt may have on your estate. A good estate plan factors in all the details and ensures your plans maximize the value of your estate, and minimize your heirs’ liabilities.
Click here to read a real life story about how we helped a client manage her mom’s estate debt