By Jeff Rivard
The saying “you can’t take it with you” is meant to remind people that no matter how much wealth you accumulate in your lifetime, you’ll have to leave it behind when you pass. Unfortunately, for your heirs, the same goes for your debts.
Turns out that dying is no excuse for defaulting on debt. So then the pertinent questions become
1. who is responsible for making good on any financial obligations, and
2. can your assets be used to satisfy certain debts
In most cases, creditors are compensated from the portion of your estate that passes through probate—any assets that are part of a Will. This means that the person you appoint as the executor of your estate is responsible for settling any debts before any inheritance is paid out to your heirs.
This means that if you aren’t careful, and you accrue more debt than your estate is worth, your heirs will potentially receive nothing.
And what if the value of your debts exceed the value of your estate? In that case, your creditors may be out of luck.
In certain instances, creditors can pursue other means of reimbursement. For instance, if someone was a co-signer or guarantor on a debt, they would assume that debt. Also, if there is debt related to property and that property was jointly owned, the co-owner is responsible to pay off the debt. And even if there was no official joint ownership, similar circumstances can apply for spouses who live in “community property” states, which automatically consider property acquired over the course of a marriage jointly owned.
Here are a few other common debt scenarios:
If you owe money on a piece of property, and it is jointly owned or inherited, that joint owner or heir becomes responsible for the balance of the mortgage. They are not, however, expected to pay it off immediately. In most cases, the remaining party simply assumes the mortgage payments.
A Home Equity Line
On a related note, anyone inheriting property becomes responsible for paying back any home equity debt accrued against that property. And, unlike with a mortgage, banks can require immediate payment in full. Since this is often impossible without selling the property, most banks will allow an heir to assume the monthly payments going forward.
Similarly, if someone inherits a car, they can usually just take over the payments going forward. If, however, they fail to make the payments, the lender can repossess the car.
Unless there was a co-signer or the debt was accrued during a marriage in a community property state, lenders are not able to compel anyone to pay off unsecured student loans. In a community property state, the spouse can be held responsible (if the loan was made during the marriage). Many lenders, including Sallie Mae and Wells Fargo, will, however, forgive such debts upon death.
Since credit card debt is also unsecured, the bank holding it won’t have any recourse to collect if the estate can’t pay and there wasn’t any joint account holder. If there was a joint account holder, that person does inherit the debt, but that same burden does not apply to anyone who was simply an authorized user. And, once again, in community property states, the spouse will assume any debt accrued during the marriage.
The good news, is that there are some assets that are usually safe from creditors. Primarily, these are retirement accounts and life insurance benefits. In both cases, these are assets that do not go through probate— since they are paid directly to your named beneficiaries.
To learn more about which asset protection strategies might make the most sense for your situation, you should speak with an estate planning attorney. Taking a few preemptive steps now could save your heirs a great deal of money and stress down the line.