When someone dies, their debts do not simply disappear – but they also do not automatically become the responsibility of their children or other beneficiaries. Understanding what happens to debt after death can prevent grieving families from paying bills they may not personally owe.
Generally, debts are handled as part of the administration of the deceased person’s estate. Creditors may have claims that must be addressed before the remaining assets are distributed to beneficiaries. Debt can therefore reduce what beneficiaries ultimately inherit, but inheriting property does not necessarily mean inheriting the deceased person’s personal liability for the debt.
California is a community property state, which makes this issue particularly important for married couples. Certain debts incurred during marriage may involve community property and can affect a surviving spouse even when an account was held only in the deceased spouse’s name.
Joint borrowers and co-signers are also different from beneficiaries. If you jointly borrowed money or co-signed a loan, you may remain responsible after the other borrower dies. An authorized user on a credit card, however, is not necessarily responsible simply because he or she was permitted to use the card.
For that reason, families should not immediately pay a deceased loved one’s debts from their own funds or sign repayment agreements without first determining whether they are legally responsible.
If a home has a mortgage, the mortgage does not disappear when the owner dies. It remains attached to the property. Depending on the circumstances, the person inheriting the home may be able to keep the property by addressing the loan, pay it off or refinance, sell the home and satisfy the mortgage from the proceeds or allow the lender to pursue the property.
Reverse mortgages require particular attention because the borrower’s death can trigger repayment requirements and deadlines. Families who want to preserve the home should understand their options and act promptly.
Federal tax debt generally does not disappear at death either. Outstanding income taxes should be identified and addressed during administration before assets are distributed. An executor or trustee should be especially cautious about making distributions when federal taxes remain unpaid, because a fiduciary may face personal liability in certain circumstances if estate assets are distributed without properly addressing federal tax obligations.
A good estate plan does not make legitimate debts disappear. What it does is create a clear structure for who has authority to act, how assets will be managed and how creditor claims will be handled.
A properly funded revocable living trust can allow a successor trustee to begin managing trust assets without waiting for a probate court appointment – particularly valuable when there is a home to maintain or sell, a mortgage requiring attention or other time-sensitive financial matters.
Estate planning is not only about deciding who gets what. It is also about making sure your family knows who is in charge, what needs to be done and where to turn for guidance when the time comes.
STop of Formend your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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