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Who pays your debts when you die?

On Behalf of | Aug 11, 2023 | Estate Planning |

A lot of seniors worry about whether or not their deaths will leave their loved ones – especially their adult children – with a burdensome amount of debt.

From credit card bills to burial expenses and that inevitable final tax bill, it’s almost impossible to die without owing somebody something. How that debt is handled, though, depends very much on the individual situation. Here’s what you need to know:

Your debts go to your estate, not your heirs

Debts that are solely in your name, such as a car note or hospital co-pays, go to your estate. Those have to be paid before any assets are distributed to your heirs.

If there’s not enough money in the estate to pay all of the bills, the bills will be prioritized. Creditors with secured debts may be able to reclaim the collateral that backs their loans. For example, if you have a mortgage, the bank may foreclose. Creditors with unsecured debts, like any credit cards with balances due, will simply have to accept the loss – unless you have a living co-signer who is considered equally responsible for the bill.

None of these creditors, however, can transfer your debts to your heirs. In essence, what’s in your estate will have to do.

Assets that bypass your estate don’t need to be used for your debts

It’s important to note that assets that transfer directly to their designated beneficiaries never become part of an estate, which means those assets aren’t part of the equation when it comes time to figure out what debts need to be paid. For example, if you have life insurance policies that pay directly to your adult children, that money never becomes part of the probate process. Your beneficiaries are entitled to keep that money, and your creditors cannot force them to use it to pay off your debts.

Your funeral and burial costs may be a different story

Generally, your funeral and burial (or cremation) costs are supposed to come out of your estate. If there’s not enough money in the estate, your loved ones may have to pay the bill – but only if they sign an agreement with the funeral home to that effect. If you’re concerned about the potential financial strain that might cause, it may be wise to consider adding a prepaid funeral arrangement to your estate plans.

Effective estate planning can help you leave more behind for your loved ones. Seeking experienced legal guidance can help.