For Mark Roberts’ Use: While we all hope to manage our debt loads during our lifetimes, it’s normal to pass away still owing money to one or more creditors. It might only be last month’s bills, or it might be a more significant amount like a mortgage. Either way, most of us hope not to burden our loved ones with our debts after we pass away. What happens to debts after our deaths will depend upon the type of debts we hold.
A secured debt is one that is backed by an asset, like a mortgage on a house. With secured debts, heirs must either make the monthly payments, or sell the property to pay off the debt. Otherwise the property would face foreclosure or repossession, which would be an unfortunate occurrence for heirs who would’ve at least inherited the equity in the asset.
Unsecured debts, like credit cards and personal loans, are a different story. The type of debt and your state’s laws will determine what exactly happens with those debts, but in general the following guidelines will apply:
Protected assets. In most cases, creditors cannot seize assets such as life insurance benefits, jointly held property, retirement plans with named beneficiaries, and pay-on-death bank or brokerage accounts. This rule only applies if beneficiary forms were fully and correctly filled out. Otherwise, the funds can become payable to “the estate”, and from there, creditors can claim funds.
Medical bills are the spouse’s responsibility. Final medical bills are generally assumed to be the surviving spouse’s responsibility. However, in cases where there is little income or assets, or if the deceased had no spouse, hospitals will often write off the final amounts due (this is not guaranteed, however).
Cosigned debts can be tricky. If someone else cosigned a loan or credit card with you, they can be liable for the remaining balance even if the two of you had a standing agreement that you paid the bill. Student loans are particularly tricky; most lenders will not waive the remaining balance.
As you can see, managing debts can be tricky with regard to estate planning. Meeting with an estate planning attorney is essential for everyone. In the meantime, make sure those beneficiary forms are completed correctly for each account in which you hold funds, and consider back-up beneficiaries just in case.
For more information on financial planning with regard to end-of-life issues, call us to schedule an appointment. We’ll help you evaluate your situation and decide how to proceed next.