Estate planning is an important legal process where you decide what you want to happen to your various assets now, and after you pass away. While most people look primarily at how they want to protect their assets, who they want to get things, and how loved ones will be cared for, that is really just one component. For many people, the estate is also going to be responsible for handling all existing debts.
It is very common (and in many cases, smart) to hold debt for most people. This could include things like a mortgage, car loans, credit card debt, personal loans, tax debt, student loans, and more. When you pass away, this debt doesn’t simply disappear. How it is handled will depend on your situation and the type of debt you hold.
Debt Passes to Other Parties
There are some types of debts that will pass on to another party when you die. The following are among the most common examples of this:
- Co-Signed Debt – If another party co-signed for the debt, they will become responsible for repaying the amount due according to the original agreement.
- Joint Accounts – If there is a joint owner of the debt, the other party will ‘inherit’ the debt and have to make the payments.
- Spouses in Some Cases – In many cases, your spouse will become responsible for the debt when you pass away. This typically does not, however, include debts that were in place prior to the marriage.
Paid by the Estate
Most types of debts will be paid for by the estate. The executor of your estate will gather up all your assets and use them to pay off any outstanding debts. They will have a great deal of flexibility when it comes to how they will make these payments. In many cases, the money from cash accounts (checking, savings, etc) will be sufficient to pay off debts. When this is not the case, assets may need to be sold to pay off the debt.
Not All Assets Can be Used
There are some types of assets that creditors can’t take to fulfil the debt. The most common example of this is a life insurance policy. If you have a life insurance policy with a loved one named as the beneficiary, they will get that money regardless of how much debt you have. Certain retirement accounts will also be exempt from the claims of creditors.
Remaining Debt Is Written Off
In the event that there is more debt than assets in your estate (excluding the exempted assets), the creditors will simply have to take a loss on the money that is owed. Other than the situations listed above, they cannot come after loved ones for debts that were solely your responsibility.
