Friday, November 20, 2020
Although some debts are relieved when you die, others may have a great impact on your family. Below are a few things you should know about incurring debt and how those debts may impact your family after your death.
First, after you die, your debt becomes apart of your estate. Dividing up your debt is done in a process called probate. "The length of time creditors have to make a claim against the estate depends on where you live. It can range anywhere from three months to nine months. Therefore, you should get familiar with your state’s estate laws, so you are well aware of which rules apply to you."
You should know that Beneficiaries' money is partially protected but only if they are named properly. Unsecured creditors usually will not be able to touch funds that are in life insurance policies or 401(k)s. However, if beneficiaries are not named until after your death, the funds will go to the estate leaving them open to creditors.
Credit card debt will not disappear so easily. It is the norm for the estate to pay credit card debt using the estate's assets. So long as children are not a joint holder on the account, they will not inherit credit card debt. If a surviving spouse is a joint borrower, they will be responsible for their deceased spouse's debt. It is important to pay attention to joint applicants and joint borrowers on your credit card accounts, whether or not they had anything to do with the credit card following the paperwork.
Federal student loan debt will be forgiven. Once the borrower dies, the debt is forgiven, however, proof of death is required. This rule is not the same for private student loan debt. Although some loan programs offer loan forgiveness upon death, others are not so generous. Thus, it is important to know where your student loans came from and who the borrower was, especially for private loans.
In regard to your mortgage, if your heirs inherit property, lenders must allow them to take over the mortgage. However, heirs are not required to keep the mortgage and can refinance or pay off the debt. This same rule applies to the surviving spouse.
Marriage is very important. If your spouse dies, you are legally required to pay any "joint tax owed to the state and federal government."
It is very important for you to organize your debts and use any safeguards possible to plan for your debts and how they may impact your family in the event of your death.
See Michael Aloi, Debt After Death: What You Should Know, Kiplinger, November 2, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.