When it comes to estate planning, most of the issues are straightforward. The biggest questions often involves figuring out who gets what – in other words, what will happen to your wealth and material goods when you shake off this mortal coil. Unfortunately, however, there’s something else many seniors are leaving behind which no one wants: debt. Many family members are watching aging parents racking up medical debt, credit card debt, even co-signed student loan debt, and they’re wondering, “Is that going to become my burden one day soon?”
Dying with Debt: State Law and the Type of Debt Are Critical Questions
Recently we came across this CNBC article by Sarah O’Brien, clarifying what happens to a person’s debts when they die. “When a loved one passes away, it’s not unusual for the person to leave some unpaid debt behind,” writes O’Brien. “The question for the surviving spouse or other heirs is often: What happens to those obligations? Generally speaking, it depends on both the type of debt and applicable state laws.”
Whether you have a large pile of assets or a tiny one, when you die all those assets become part of what the courts consider your estate. The legal dictionary defines “estate” this way: “Generally, this term means all the assets and property owned by a person when that person dies,” which includes money, real estate, and all your stuff. When you die with debt, it’s your estate that your creditors will go after to try to collect what’s owed.
“Fortunately,” one planner told CNBC’s Sarah O’Brien, “for surviving spouses or other beneficiaries, in most cases that debt isn’t something they’d be responsible for.” However, there are some exceptions, especially here in a community property state like Washington.
Dying with Debt: Rules Governing Discharge of Debt Vary State to State
The CNBC article provides some helpful background information. For example, “probate” is simply defined as the process of paying off all your debt and then distributing any remaining assets from your estate to your heirs. Probate rules differ from state to state, and so do rules about debts owed by the person who has died. “Each state has its own laws governing how long creditors have to make a claim against the estate during [probate]. In some places it’s a few months. In other states, the process can last a couple of years.” Generally, Washington State law gives creditors up to four months to file a claim.
If someone dies with multiple debts, which ones take precedence? Once again, each state has its own set of rules. “In most states, funeral expenses take priority, then the cost of administering the estate, then taxes and then most states include hospital and medical bills,” Steven Mignogna, of the American College of Trust and Estate Counsel told CNBC.
Dying with Debt: With Good Planning, Assets Pass Directly to Heirs, Bypassing Creditors
However, he added, not all of a person’s assets count the same way probate purposes. If you have life insurance or a qualified retirement account with a designated beneficiary, those assets go directly to that person and are not subject to probate. “Additionally, assets placed in certain types of trusts also pass on outside of probate, as does jointly owned property (e.g., a house) as long as it is titled properly,” adds the article.
Depending on how an estate is structured, it could be insolvent on paper, lacking the means to pay off its liabilities, and still have substantial assets that pass untouched to heirs. This is yet another reason why good legal advice is critical in preparing your estate for your eventual passing.
Dying with Debt: Community Property Laws Mean You Inherit Your Spouse’s Debts
This column that was published a few years ago in the News Tribune in Tacoma spells out the rules of insolvency clearly. If there’s not enough in the estate to cover unsecured debts (credit cards, medical bills, personal loans) “then [the] estate is declared insolvent, and [the] creditors will have to eat the loss.” But it’s a different story with secured debts. If there’s a mortgage or car loan, either the estate assumes the monthly payments, or else the property is sold and the lender paid back. But beware of an important stipulation. If you are joint holder on a credit card or if you co-signed a loan, you are legally responsible for that debt.
If you live in Washington, you’re typically not freed from debt when a spouse dies. Washington is one of nine so-called community property states. (The others are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Wisconsin.) “In these states, any debts that one spouse acquires after the start of a marriage belong to the other spouse, too,” says the News Tribune. The CNBC article states the same thing. “Both assets and certain debt that accumulated during the marriage [are] equally owned by each spouse – meaning a surviving spouse could be responsible for paying back the debt, even if it was only in the decedent’s name.”
If an inherited debt presents a hardship to a surviving spouse, it may be possible to get it discharged. “In the probate process, you let the company know the estate has little to no assets to cover the debt and you ask that it be forgiven,” one expert told CNBC. But if you were a co-signer, it could be tougher. Chances are the debt will remain yours to pay off.
The critical take-away is the need to plan. Fortunately, that’s our specialty here at AgingOptions, even during the continuing COVID-19 stay-at-home order. Here’s how.
Two Important Retirement-Planning Announcements from AgingOptions
At AgingOptions our chief desire is to help you prepare for the kind of retirement you’ve always dreamed of having. Toward that end, we want to share two important announcements that are designed to facilitate your LifePlanning process even during this period when most of us are required to avoid gathering in groups.
First, in cooperation with our partners at LifePoint Law, we are excited to launch a ground-breaking new service called the LifePoint Law Emergency Legal Kit. Without leaving your home, you can now consult with a LifePoint Law attorney who will work with you to prepare and sign a complete set of vitally important legal documents including both Financial and Healthcare Powers of Attorney, a Living Will/Advance Directive, a Will or Trust, and much more. Click on the link or call us at AgingOptions and we’ll explain this excellent service to you.
Second, Rajiv Nagaich has scheduled several of his popular, free LifePlanning Seminars in the form of webinars that you can watch conveniently at home. Simply visit our Events Page and register for the webinar of your choice.
Reliable information has never been more important – and that’s our promise to you at AgingOptions and LifePoint Law. Age on!
(originally reported at www.cnbc.com)