Debunking Debt after Death: What Happens to My Money?
American adults hold an average of almost $30,000 in personal debt. Collectively, Americans owe $9.4 trillion in mortgage debt, $1.48 trillion in student loan debt, $1.3 trillion in auto loan debt and $1 trillion in credit card debt. It’s no wonder we want to know what happens to our debt if we pass away. Many think debts die with us, but the truth is certain debts may live on to haunt loved ones.
We can take control of our money now so our legacy in death isn’t debt. It starts by finding out what others may be responsible for and ends with protecting your assets from debt collectors. Here’s everything you need to know about what happens to your money after death.
Do loved ones inherit my debt if I die?
When you pass away, everything you owned comes together to form what is known as your estate. The estate includes cars, homes, other real estate, bank accounts, possessions and anything else with value.
It’s the executor of your estate’s job to gather your assets, deal with taxes, pay off your debt and disperse inheritances. This distribution process is called probate. You appoint someone you trust to be the executor of your estate in your will, or else the court appoints someone for you.
Typically, your estate pays any debt you owe. If your total liabilities equal $200,000 and you have a $300,000 paid-for home, plus $25,000 in the bank, there would be $125,000 leftover (minus some fees) as an inheritance.
Before your loved ones accept any money from the executor, they should post a public notice letting creditors know you’ve passed away and encourage them to contact the family. There may be old debts your family doesn’t know about. The last thing you’d want to happen is for your loved ones to give back money they already spent. Depending on your state, creditors have three to six months to make a claim after the notice.
What happens if my estate isn’t big enough to cover all my debt?
In some cases, the deceased’s debt is more than their combined assets. When this happens, the estate is insolvent.
Your assets are sold off, and the profits are used to pay debts by order of priority. The exact order varies by state, but usually, fees like attorney, fiduciary, executor and estate taxes are first on the list, with secured debts coming up next, followed by burial and funeral costs. If you were the family breadwinner, the family is paid next with a “family allowance.” The amount ranges by state and may be up to $24,000. Afterward, come federal taxes, followed by medical expenses that weren’t covered by insurance and property taxes. At the very bottom of the list are unsecured debts like credit cards and personal loans.
Since secured debts are backed with an asset, the collateral is sold off or repossessed to pay the outstanding bill. Your mortgage, for example, uses your home as collateral. If your kin wants to keep the asset, they can usually assume the debt through refinancing.
Unsecured debts — like credit card charges, personal loans without collateral, student loans, and utility bills — all generally die with you if there isn’t enough money left over in the estate, but not in all instances.
Unfortunately, some types of debt will outlive you, but that’s usually the case only when someone else’s name is also on the loan or because of state laws. You’ll have to look into:
Cosigned debt: What cosigners might not realize at the time of signing is they agreed to pay your debt if you die. If your parents cosigned your college loan, for instance, they’d be responsible for covering it. Daniel Maura, CEO and Founder of Sevfin LLC, an account, tax and business consultancy advises, “It’s best to avoid cosigning a loan at all costs, unless you’re comfortable potentially assuming that debt.”
Community property debt: Nine states give you the option to declare joint ownership of your assets with your spouse —Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If you made your property a community property, your other half might be required to pay certain types of debt, even if the loan was only in your name.
Long-term care debt: Nearly 30 states have filial responsibility laws making children liable to their deceased parent’s long-term care costs, like hospital or nursing home expenses. While courts rarely enforce these laws, it always helps to be prepared, just in case.Joint debts: Mortgages and auto loans are the most common types of joint debt, but nearly any debt can be a joint debt. If your spouse has joint debts with you and you pass away, they’ll need to continue paying them.
What about the most common debts?
You might be wondering about specific debts you have and what would happen to them if you passed away. Let’s see how some of the most common debts are generally handled.
Your estate pays off any auto loans. Lenders can repossess the car if the estate is insolvent. The heir may also assume the debt and either continue making car payments or sell the vehicle to pay off the loan.
If you have a joint account with your spouse, they’re required to continue paying off the debt. As an alternative, some of the best credit cards allow authorized users. Authorized users can share a card with you, but aren’t held liable in most states for your credit card debt. If you’re the only account holder, either your estate pays the bill or the credit card company writes off debt if you don’t have enough assets.
Home equity loans
If you borrowed against your home’s value through a home equity loan, the person inheriting your home would be required to pay it back.
Medical debt is one of the most complex debts on the list because states have varying rules on how to handle each type of medical debt upon your death. In general, medical bills take priority when liquidating your estate. If you received Medicaid benefits, your state might ask for repayment. Consult with an attorney to be sure of what can happen with your medical bills.
Joint mortgages pass on to your spouse without much hassle. If your will states your spouse gets the house, for example, they can assume the mortgage. Your spouse can also refinance mortgage rates that are too high for their budget, or take a reverse mortgage to pay off the mortgage loan.
If you’re the only one listed on the deed and there’s no will, the home becomes part of the estate. Your state laws will say who is entitled to the house. It may be that only a portion of the house goes to your spouse, while other parts go to your children from prior or current marriages. Inheritance laws can be challenging to navigate, so this is another situation where it may be best to talk with a lawyer.
No matter what the situation is, someone — anyone — should keep making the full monthly payment on the mortgage while any mortgage issues are resolved. Some mortgages have a “due-on-sale” clause that requires the entire mortgage to be due at once if the house is sold or transferred to a new owner. The Garn-St. Germain Depository Institutions Act of 1982 stops lenders from foreclosing on the house, but only if the mortgage is up to date.
If you were to die, your federal loans are written off, including Parent Plus loans. Private loans go through the probate process. If there’s not enough money in the estate to pay student loans, lenders will usually write them off as well. One big exception is if the private loan has a cosigner. Cosigners are liable for your entire student loan balance upon your death.
Daniel Maura says, “Timeshares have a perpetuity clause which pass them on to heirs through probate. Heirs can refuse the timeshare, but it will still have to go through the probate process.” If your inheritors do keep the timeshare, they’re responsible for paying its annual maintenance fees.
How do I protect my assets from debt collectors when I die?
Creating a will and living trust goes a long way in clarifying and simplifying the distributions of your assets when you die, but they can’t protect everything from creditors. There’s essential information to be aware of so your assets go to loved ones and not debt collectors.
Know what creditors can’t touch
Unless it’s a joint or cosigned account, it’s illegal for debt collectors to ask the surviving family to pay your bill. And your family doesn’t have to pay debt collectors a single penny of their own money. Anything owed upon your death can come out of the estate or be written off if there’s more debt than the estate’s value.
That probably won’t stop debt collectors from trying, and they won’t care much that your family is grieving. If they don’t let off, loved ones can send a cease and desist letter or say that all creditors must speak with the family attorney. An attorney is a powerful ally in making sure your estate is handled correctly and that surviving kin aren’t being taken advantage of.
Creditors also can’t ever come after accounts with living beneficiaries. This is true for any type of account, whether its a retirement account, life insurance policy, living trust, money market account or certificate of deposit (CD). If you want to grow your money in the best savings account for your goals, rest assured funds will go to the family if you keep your beneficiaries updated. If there aren’t any living beneficiaries, the money may become part of your estate and be used to pay off debts.
Some states also shield certain assets from being liquidated to cover debts, so consult with an attorney or check your state laws for more information.
Take out an insurance policy
Life insurance can be one of the greatest gifts you can leave behind. As an added bonus, insurance payouts normally aren’t taxable. Term life insurance policies are sufficient for most people. Plans are for a set number of years and are cheaper than whole life insurance.
What happens to your money after death is up to you
What you do and know while living is your greatest asset in protecting your belongings, leaving an inheritance and creating a lasting legacy. Regardless of your age, the best time to craft (or update) a will is now. You’re in control of precisely what you want to happen to your possessions, including trust funds, savings accounts and even beloved pets, but only if you make that choice while living.