Wise financial planners obtain a Last Will and Testament to safeguard lifetime assets for their heirs. The question is, what happens if there’s nothing left of the estate? A lot of nest eggs are being scrambled by the tough economy, bad investments and people simply living longer than expected. If there’s nothing left to cover outstanding bills, will kids inherit their parents’ debt?
The short answer is no ... not in most cases. And it’s wise for death benefit recipients (or their guardians) to seek legal advice if they’re being pressured into paying off bills that may not be their responsibility. Aggressive creditors have been known to coerce heirs into satisfying debts and many pay just to be left alone.
In general, children aren’t responsible for their parents’ unsecured debts – i.e., credit cards, personal loans, medical bills – that aren’t collateralized by physical property. If there’s not enough money in the estate to cover those bills, creditors have to write them off.
The exceptions include the following:
• If the child, spouse or other acquaintance is a co-signer on a credit card or loan, they share equal responsibility for paying it off. Always think twice before co-signing any loan.
• If someone is a joint account holder – that is, his or her income and credit history was used to secure the loan or credit card – that individual is generally responsible for the unpaid balance.
• Widows and widowers are responsible for their deceased spouse’s debts if they live in a community property state.
Note that authorized users on credit cards aren’t liable for repayment since they didn’t originally apply for the credit. However, to protect children from being bothered by creditors, it’s wise to remove them from credit card accounts as soon as they have established a sufficient credit history to apply for their own card.
Outstanding secured debts upon death, such as a mortgage or car loan, must be paid off by the estate to avoid possible seizure by the creditor. For example, if parents were planning to leave the house to the kids, they’ll either need to pay it off before death or make arrangements for continued payments that also will cover property taxes and insurance.
Depending on state laws, there are a few types of assets like life insurance proceeds and retirement benefits that decedents can pass along to beneficiaries without interference by a probate court or taxation. These too are safe from creditors.
Be aware also that benefits left to an estate (rather than an individual) are fair game for creditors. It’s wise to name specific beneficiaries – and back-up beneficiaries – in a will and update the information as needed in the event of drastic changes in the family.
For more information, check with a probate attorney or legal office familiar with your state’s inheritance and tax laws.
One last thing: Individuals expecting to leave large unpaid bills behind should alert their family of the outstanding debt so they won’t be blindsided in the midst of grief.