What happens to my debts after I die?

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Posted by Alicia Waltenberger on Jul 21, 2016 1:35:00 PM
Inheriting property can sometimes be a mixed blessing. Along with that lake house may come a set of hideous furniture you need to pay someone to remove. But what about debt, does any of that pass on to heirs?
I get asked this question a lot. I guess it’s because debt can be such a presence in our lives as to seem almost tangible. Surely it doesn’t just vanish into thin air after we die?
Generally speaking, when you pass away, your executor is charged with probating your estate, making an inventory of assets (money in your bank account, any property you own, etc.) and notifying creditors.
That may include credit card providers, mortgage lenders—basically anyone to whom you owe money. These creditors will essentially get in line to make claims on your estate. Once your assets have been identified, they are consolidated and used to pay off all your unpaid bills—unless the creditors’ claims outnumber your assets. In that case, the posthumous repayments will likely be prorated and every creditor may expect to get at least something back; any outstanding debt is simply forgiven during probate. Certain institutions, notably the IRS, will get to jump to the front of the line. So let’s say you have an unpaid federal tax bill of $1 million, say, and your estate amounts to less than a million, the other creditors will likely walk away empty-handed, and may contact your heirs in an attempt to recover their money.
What about a surviving spouse who held a joint bank account with the deceased? In most states, a creditor may try to make a claim, but if the widow or widower in question can demonstrate that the contested money is theirs, and/or that they are in no way responsible for the debt, they generally won’t be liable to pay off the debt using those assets.
Similarly, the only time a surviving spouse or other heir would be required to pay off an outstanding credit card balance is if the card was co-signed, and the account jointly held. If a husband had been using his deceased wife’s credit card, but was an authorized user rather than a co-signer, he should also be off the hook. Your surviving spouse (or any other family member for that matter) is not generally responsible for paying back any loan that was taken out solely by you. However, this may not be the case if you reside in a community property state; it’s important that you consult with a tax professional to understand which debts you might be on the hook for if your spouse passes away.
The key point is that when you die, your debts are passed on to your estate, and your creditors may attempt to collect what’s owed from any worldly property or money you left behind before they are passed on to your heirs. If you rack up a lot of debt during your lifetime, those heirs won’t strictly inherit the debt. But unless you protect your assets while alive (for instance, by setting up an irrevocable trust) your loved ones may pay, in a sense, by losing out on the inheritance they’d hoped for.
The experts’ responses are not intended to provide tax, legal, or financial advice. They contain general information for your consideration that you should discuss with your personal tax, legal, and financial advisors as appropriate.

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