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What happens to your debt when you die?

Upon hearing the word inheritance, most people tend to have positive associations. They think assets, and their mind goes to savings, real estate, jewelry, art work and cars among other things. But what about debt? If there’s a balance on your credit card when you die or a loan hasn’t been paid off, what will your creditors do? Will they hold your heirs accountable? As so often, that depends.

Generally speaking, any debt that is left after you die will be paid out of your estate, and it will be the responsibility of the executor of your will to ensure that all balances are settled. To do so, he or she may need to liquidate a part of your assets. If your debt outweighs the value of what you own, i.e. your estate is insolvent, then state laws determine in which order and to which extent obligations must be repaid. Once your assets are depleted, some of your debt may just go unpaid. In most cases, no one will go after your family members or any other heirs.

Exceptions apply. Your heirs can always be held responsible for your debt if they cosigned the obligation, and in some instances even if they didn’t. There are, for example, states that require a deceased person’s spouse to pay off certain obligations such as some health care expenses. There are also states — California being one of them — where, per law, spouses share all assets and obligations accumulated during a marriage. In these community property states, a surviving spouse is responsible for paying off the deceased partner’s loan or credit card, even if it was only in the deceased person’s name. Whether the surviving spouse actually ends up settling the balance depends on various factors. In many situations, creditors decide that forgiving the debt is the cheapest way out. In others, surviving spouses (or their attorneys) can prove that they did not in any way benefit from the credit card or loan in question, and they are off the hook.

Speaking of debt and estate planning, let me repeat a point already made in earlier posts: Placing your property in a living trust will not keep it safe from creditors. (This is because living trusts can be changed or revoked at any time.) An irrevocable trust, on the other hand, is a whole different animal; if you set it up bona fide, meaning your intent wasn’t to defraud potential creditors, then they cannot lay claim to your assets.

By Kevin J. Moore