What Happens to Your Debts When You Die?Submitted by Bernhardt Wealth Management on November 4th, 2019
In Mexico and other Spanish-speaking countries, the beginning of November marks the Dia de los Muertos, “the Day of the Dead.” This is a time when families remember their departed loved ones at special church services, by decorating their gravesites, by singing and telling stories, and with special foods and other observations. It is actually a time to celebrate life by savoring the memories of those who are no longer present.
For most of us, however, death is not a topic we prefer to contemplate. Similarly, we don’t like to think about debt, other than sending the monthly payments they usually entail. But a recent survey in the UK indicates that reluctance to discuss the financial ramifications of death—especially death of a breadwinner—can set the survivors up for some difficulties that could be avoided by a few preparatory steps taken before the passing of a loved one.
Probate laws can vary from state to state, so it’s vital for everyone to make sure that they have a valid will in place and that the will conforms to the laws of the state in which they reside. A copy of the will should be kept in a secure location that is known to a spouse or other trusted person.
One of the major problematic areas involves debt incurred by the deceased. It’s important to know that different types of debt are treated differently by the probate laws. Absent specific instructions in the will, the probate court will rank the debt in order of priority, and any available liquid assets in the estate at the time of death will be used to satisfy those debts. Typically medical and mortgage debt top the list. On the other hand, if the deceased co-owned property with a spouse, the surviving spouse will usually be allowed to continue making payments on the mortgage according to the same arrangements that were in place before the deceased spouse’s passing. If the deceased bequeathed the home to someone, the heir will also usually be allowed to continue making the mortgage payments as long as they wish to retain ownership.
Credit card debt is typically unsecured, so it ranks lower in the list of priorities. If a married couple has a credit card account, the debt may pass directly to the surviving spouse, but in some cases it doesn’t. Especially if you live in a community property state, this is something you should find out ahead of time, especially if you typically carry larger credit card balances.
Assets like life insurance and annuity proceeds and retirement account balances, all of which have stipulated beneficiaries, do not become part of the estate and may not automatically be used to satisfy outstanding debts. Instead, these proceeds are paid directly to the beneficiary, separate from the probate process. It is very important, however, for a spouse or other trusted person to know about these types of assets, where they are held, and whom to contact in the event of the death of the owner. Regular (non-retirement) investment accounts, however, typically do become part of the estate. Even if they are held in a special type of ownership, such as joint tenancy with rights of survivorship (JTWROS) or a transfer-on-death (TOD) account, they are still considered part of the estate. They may be subject to passing outside the probate process, however.
If you or someone you love needs advice regarding estate planning, wills, or other financial matters, our network of skilled legal and financial professionals can help. Please get in touch with us and let us develop a personalized solution for you.