Thursday, June 16, 2016

Who Pays My Debts When I Die?

Our clients frequently tell us that our Living Trust is a thoughtful end-of-life planning package that helps them think about how they will distribute their assets to their families. We include a Financial Power of Attorney, an Advance Healthcare Directive and a Pour Over Will. We include a place to note contact information for healthcare providers, veterinarians, financial advisors and other key people who would need to be contacted if anything happened to them. These days, we also advise our clients to provide their login information to their online accounts.
We’re zealots when it comes to Living Trusts, yet an estimated 50% of Americans die without one—and that means Probate, the public, court-administered process of administering an estate.

After you die, your debts become the responsibility of your estate

Your estate is everything you owned at the time of your death. Settling an estate is a matter of looking very clinically at your assets in relation to your liabilities. Your executor (the person responsible for dealing with estate after your death) will use your assets to pay off your debts. This could mean writing checks from a bank account or selling off property and assets to get the money. If there isn’t enough to cover the debt, creditors generally are out of luck. But some debts have unique properties.

Here’s a look at who’s left holding the bag for debts if you die.

  • Mortgages and home-equity loans. If a property has a mortgage, the lender has some protection, at least up to the value of the property. But federal law bars lenders from forcing a joint owner to pay off the mortgage immediately after the death of another co-owner. This also applies to any relative who inherits the home and lives in it. Practically, this means the family member or co-owner can simply take over the mortgage payments, at least for a certain period of time; but check the rules about this.
  • An outstanding home-equity loan against the property is different. A lender can force someone who inherits a home to repay the loan immediately, which could require selling the house. That said, lenders might work with new owners to allow them to simply take over the payments on the home-equity loan as well.
  • Auto loans. If the auto loan isn’t fully paid off, the lender has the right to repossess the car. But typically whoever inherits the vehicle can simply continue making payments, and the lender is unlikely to take action.
  • Credit cards. Once the estate runs out of assets, credit card companies are out of luck, because this debt is not secured by assets the way mortgages and car loans are. Any joint account holder would be responsible for the bill, but people who are simply authorized users of a card would not.
  • Spouses and debt. In community property states, which includes California, spouses are responsible for any debts incurred during the marriage—including credit card debt.
  • Student loans. Lenders have no recourse if the estate does not have assets to repay student loans. Federal student loans are discharged upon the student’s death.

Beware collection agencies . . .

If your relatives are not responsible for your debts, collection agencies may still legally call to discuss debts and to try to find someone authorized to pay them, according to the Federal Trade Commission. But collectors cannot mislead family members into thinking they’re responsible for the debts. There are, however, circumstances in which spouses or other people would be personally responsible for your debts. These include if they:
  • Co-signed for a loan
  • Are joint account holders

What’s protected: Retirement accounts and life insurance

Creditors typically cannot go after retirement accounts or life insurance proceeds. Those will go to the named beneficiaries and are excluded from the Probate process. But if the life insurance beneficiaries you named are no longer living, your death benefit may go into your estate and can be subject to creditors—a compelling reason to keep your policy updated.

Have you created your Living Trust? Most of our clients are delighted with how easy the process was. The California Document Preparers team helps you through every step.

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