While planning your estate, you want to minimize your debts so your heirs do not become responsible for them. What if you do not clear all your debt before your death?
CNBC explains what happens when a person dies with debt. Get the facts on the matter, so you make well-informed decisions for your estate and loved ones.
Surviving spouses and heirs do not bear responsibility for a deceased loved one’s unpaid debt. The probate process handles unpaid debt and distributes assets. Usually, funeral expenses take financial priority, followed by estate administration, medical bills and taxes.
Not every asset becomes part of your estate when you die. For instance, your individual retirement account and life insurance death benefit go to your named beneficiary, not probate court. You may also use trusts to avoid probate. When a person has an insolvent estate, that means the deceased lacks the means to resolve unpaid debt, but assets still go to beneficiaries rather than creditors.
Some states have community property laws. That means that if spouses accumulate debt during their marriage, they both own the debt. When one spouse dies, the surviving spouse must pay the shared debt, even if only the deceased spouse’s name appears on the paperwork.
Even then, a surviving spouse may discharge the debt. Doing so involves submitting a debt certificate and requesting that creditors forgive a debt that the deceased’s estate cannot cover.
By understanding how to navigate unpaid debt while planning your estate, you help yourself to peace of mind. Get the facts, so you know how to take care of your loved ones.