Have you ever wondered what would happen to your debts if you passed away before paying them off? Will your loved ones be obligated to pay your debts or will they simply disappear? Every person’s debt landscape is different, and the best approach is to create a tailor-made estate planning strategy to make sure your debt doesn’t come back to haunt your family after you’re gone.
Common questions about debt after death
Many individuals don’t have a clear picture of what happens to debt when they die, so you’re not alone if you’re confused. Even if your estate plan includes a power of attorney, lifetime trusts for your beneficiaries, and other robust planning tools, not taking into account your debt when designing your plan can cause your plans to unravel. Here are some common questions about debt:
• Does my debt disappear after I die?
• Will it need to be paid by my family?
• When might someone be liable for the debt?
• What can be done to protect my family against it?
Different types of debt lead to different consequences
Most people have a number of different types of debt, which complicates the anxiety of post-death debt even further. But if we examine the different types of debt, it becomes easier to detect what types of financial actions are needed to protect your family from trouble later on.
Planning Tip: In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), assets and debts acquired during marriage are owned between spouses. Keep that in mind with each of the following types of debt.
• Student loans: If there is enough money in your estate to pay off your student loans, your student loan collectors can make a claim against your estate. It’s important to note that not all student loan companies collect on debt after death. Federal loans are generally discharged upon death, so you won’t have to worry about those. But, any co-signers on your loans will still be held responsible for your student debt. For private student loans, you’ll need to look at the terms in the promissory note since some loans are discharged on death while others aren’t.
• Credit cards: Much like student loans, credit card companies can make a claim against the estate. In addition, outstanding credit card debt is not transferred to family members with the exception of community property states or if you jointly held the credit card, say with a sibling or a spouse.
• Mortgages: Mortgage debt is a type of debt most likely to fall upon your family members after your death. Whether the property is jointly-owned, inherited by a beneficiary through a transfer on death deed, or inherited through a trust, the surviving party will very likely need to continue to make payments. This obligation remains because mortgages are secured debt, unlike most credit cards or student loans. Although the personal obligation to pay a mortgage debt may expire upon your death, the security interest in the property can only be extinguished by repayment of the debt.
• Car loans: A number of things can happen this situation. Either the outstanding balance is covered by what’s left in the estate, the car is repossessed by the lender, or the beneficiary who inherits the car essentially becomes responsible for the debt. Similar to mortgages, the personal obligation may expire upon your death, but the security interest in the car can only be extinguished by repayment of the debt.
• Personal loans: When it comes to personal loans, it can be difficult to determine the debt’s efficacy once the debtor passes away. It depends upon whether or not the loan was secured and what sorts of legal written documents were put in place at the time of the loan. In most cases, the lender will look to the debtor’s estate for repayment. It is always a good idea to bring a copy of all of the loan paperwork to us so we can examine its terms and help you develop an action plan.
• Tax debt: Tax debt owed to the IRS or a state department of revenue can be very complex. The outcome here can vary greatly depending on what type of tax debt you have, whether the government has filed a tax lien, and whether any statutes of limitation have passed. If you owe tax debt, you are not alone, but always let us know so we can incorporate it into your planning.
• Child support and alimony: Much like the other forms of debt listed here, back child support debt does not cease to exist after the paying individual’s death. A payee former spouse can generally file a claim against the estate for any back child support. In some cases, your divorce decree may require you to purchase a life insurance policy. It’s a great idea to let us know about this arrangement so we can factor it into your overall estate plan.
What do you do when planning?
Each person’s debt is different, so your best bet to avoiding your debt falling on your loved ones is to work with us to develop a tailored strategy to deal with your unique set of circumstances. There are many tools available to help manage the risk that debt presents to your family. Don’t hesitate to reach out with any questions on this or any other estate planning topic. We are always here to help.