What will happen to my debt when I die? That is a complex and complicated question that needs to be examined on a case by case basis, but the following are some general rules and some food for thought. Of course, it would be wonderful to leave an estate to our heirs or loved ones but as Baby Boomers retire many are finding they have more debt than assets. Let’s face it no one wants to leave a legacy to their loved ones that are a debt. Here are some of the common types of debt that people have and who if anyone will be responsible for the debt.
One of the more common types of debt is the dreaded credit cards. If you have a joint account or live in a community property state, your spouse is more than likely to inherit the debt. Family members or children will not be responsible for credit card debt upon the death of you and your spouse. However, your estate will most likely be held responsible for the outstanding debt and be required to pay the balance out of the estate prior to heirs receiving their proceeds.
A mortgage is very similar to credit card debt, but in case you are married there is a very good chance you own your home a joint tenant in common and both you and your spouse are on the mortgage. In the event of one of your deaths, the surviving spouse will be responsible for the mortgage debt that is outstanding. If you leave the house to relatives that live with you, they will have to obtain a mortgage in their name or work out an arrangement where they assume the rights and legal responsibilities of the remaining debt.
Student loans that were obtained through the federal government and did not have a co-signor are forgiven upon the death of the borrower. As most federal loans do not require a co-signor your heirs and estate are not responsible for this outstanding debt. Private loans that were obtained for student expenses are another story and do have to be repaid upon the death of the borrower as most of these require a co-signor to obtain. And in many instances the lender will require immediate repayment or will accelerate the repayment of these loans upon the death of the borrower.
An auto loan is one that can potentially cause some issues for your heirs or estate. If the auto is owned free and clear, you may leave it to whomever you chose. If there is an outstanding loan balance and you own the auto as a joint owner or live in a community property state, your spouse will be responsible for the debt. If you are single and you leave the auto to someone, they will need to pay off the loan or refinance the loan in their name. If no one wants the auto or to assume the payments, an option is to return the auto to the lender where they will sell it and apply any proceeds towards the outstanding debt. If the selling price does not cover the outstanding debt, the lender may come after your estate for the difference.
Of course, the government will want its share of your estate in taxes. While there are ways to minimize your final income tax return or estate taxes there is no avoiding them 100%. Here is where this area becomes tricky and that is if you have a debt that is forgiven by a creditor that will now generally become income for your estate and the lender will issue a 1099-C to the estate. In order to ensure your estate is handled properly, with regards to such issues as taxes have your executor seek the guidance of a tax professional.
Of course, if you have debts and care about what is or is not left to your loved ones it is wise to have an adequate life insurance policy taken out with a proper beneficiary named. If you have read my blog before on any life insurance issue, you know I am not a huge fan of permanent policies and tend to favor a term policy. The reason is fairly simple and straight forward, and that is term policies are very affordable and will provide your loved ones with a higher death benefit. If you are unable to obtain a proper and decent life insurance policy, you can protect your loved ones and heirs with the higher cost insurance on individual debts such as the type offered by credit card companies. But the best thing is to leave no debt to your loved ones and heir at all.
With proper planning you can minimize the toll your death will have on your loved ones by maintaining low debt levels, use and update all beneficiaries, draft a legal and binding will, seek the counsel of an estate planning attorney and leave written instructions to the executor of your estate.
