Inheriting Debt

    Inherit Debt Law BookStatistically speaking, almost three out of four people are going to die with debt, which raises a very real concern for children of the deceased: Am I going to inherit debt from my parents?

    Good news: In nearly all circumstances, you won’t!

    When a person dies, his or her estate is responsible for settling debts. If there is not enough money in the estate to pay off those debts – in other words, the estate is insolvent – the debts are wiped out, in most cases.

    The children are not responsible for the debts, unless a child co-signed a loan or credit card agreement. In that case, the child would be responsible for that loan or credit card debt, but nothing else.

    Liquidating the assets of the estate and paying off all the bills will reduce or maybe even wipe out the money that children would have inherited, but that is the tradeoff for not having responsibility for debts.

    Rising health care expenses and the cost of living, combined with a reduction in retirement income, have made the golden years much more challenging and caused seniors to accumulate significant debt.

    A 2016 survey done by Experian, revealed that 73% of people die with some combination of credit card, mortgage, auto, student or personal loan debt. 

    About 68% of people die with credit card balances (average amount $4,531); 37% die with mortgage debt; 25% die with auto loans ($17,111); 12% die with personal loan debt ($14,793) and 6% go to the grave with student loan debt ($25,391). 

    Lenders want to be repaid so whatever assets are in the estate must be liquidated to pay off those debts. That means a smaller inheritance for the survivors, but they don’t have to come out of their own pocket to settle debts from Mom or Dad.

    The good news is that, in general, you can only inherit debt if your signature is on the account. 

    Settling an Estate

    Dealing with the death of a relative shouldn’t include stress created by letters and telephone calls from creditors insisting on payment. There are laws that protect people from inheriting debt, so be cautious if a credit card company solicits payment upon a family member’s death.

    Creditors in search of payment must present their request, in writing, to an attorney for the estate or the named executor within six months of the estate being opened. No claims are accepted after that time and not all claims will be paid. 

    Some creditors don’t bother to file a claim with the estate and instead pressure members of the family to clear the debt with their own money. You are not liable for any of the deceased’s debts unless you co-signed a credit card or loan agreement. Authorized users on the account are not responsible for the debt.

    However, in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Alaska, which is an opt-in community property state), creditors may pursue a surviving spouse to settle a debt.

    If creditors continue to harass you for payment as a family member, write a letter or contact your attorney to write one on your behalf to demand they stop all contact. Under the Fair Debt Collection Practices Act, creditors aren’t allowed to discuss someone’s debt with relatives, neighbors or friends.

    Claims filed within a six-month timeframe of the estate being opened are verified by the executor and paid in order of priority set by state and federal laws.

    This is the typical order of payment:
    1. Fees such as fiduciary, attorney, executory and estate taxes
    2. Burial and funeral costs 
    3. Family allowance, depending on state statutes
    4. Outstanding federal taxes
    5. Medical expenses not paid by insurance
    6. Property taxes
    7. Credit cards and personal loans are usually at the bottom of the list.

    Solvent vs. Insolvent Estate

    One of the confusing issues for survivors of the deceased is understanding the difference between a solvent estate and one that is insolvent.

    A solvent estate is one that has enough money to pay all the decedent’s bills. For example, if you die and your assets are valued at $100,000, but there is $25,000 owed on medical bills; credit card is $10,000 and you still owe $15,000 on student loans, your estate is solvent because your assets ($100,000) are more than your liabilities ($50,000). 

    Thus, your heirs would have $50,000 to split among themselves.

    However, if the opposite were true – your assets are valued at $50,000 and you owed $100,000 for medical bills, credit cards, student loans, etc. – then the estate would be insolvent. The creditors would line up in the order given above and be paid accordingly. 

    If the money runs out before all bills are paid, the businesses at the bottom of the priority list must write off the debt and the heirs would receive no money.   

    What Happens with 401k and IRA Accounts?

    If there are funds available from an IRA or 401k account and there is a designated beneficiary (or beneficiaries) that money will pass directly to the person (or persons) and not be used to pay off the deceased person’s bills.

    If, however, the estate is the beneficiary, the money from an IRA or 401k account will go into the pool with other liquidated assets and be used to pay the decedent’s bills. 

    Who pays Medical Debt of Deceased?

    The cost of medical care, especially for those at or near retirement age, is climbing so fast that it should scare everyone in the family. The average couple retiring in 2017 will need more than $270,000 for medical expenses for what’s left of their lifetime.

    Who pays those medical bills if they die?

    The first answer is the deceased member’s estate. All assets are liquidated and used to pay creditors on a priority list. Paying medical bills is high on the priority list if the estate is solvent.

    However, if the estate is insolvent (not enough money to pay off bills), then the responsibility could fall on the children under laws known as “filial responsibility.”

    There are 30 states with filial responsibility laws that impose a duty on adult children to support their parents. There is a great deal of room for interpretation in the statutes governing each of those states, and the language used is very ambiguous.

    If you live in one of the 30 filial responsibility states, it would be wise to investigate how much support is expected and from whom. Also, be aware that even though aging population in America is growing fast, filial responsibility laws have been lightly enforced.

    One other thing to note: If your parent was on Medicaid, the state might put a lien on the sale of your parent’s home in order to recover the cost of their care.

    Who Pays Nursing Home Debt?

    As is the case with medical care, the short answer to who is responsible for nursing home debt is this: The deceased member’s estate is liable for all debts.

    It’s when the estate is insolvent that things could get complicated. The states with “filial responsibility” laws are seeing more and more nursing homes try to get payment from the adult children of the deceased. 

    The reason is that the tab for long-term care of the aging in America is up to $130,000 and many of the 1.4 million Americans in nursing homes can’t afford it. An estimated 64% of nursing home residents rely on Medicaid, which doesn’t always cover the whole bill.

    Federal law requires Medicaid programs in each state to cover nursing home care, but sometimes Medicaid funding goes down and states decrease the amount they will pay or put eligibility restrictions on coverage.

    Regardless of what happens politically, the costs for long-term care are headed in a direction where more and more seniors will not have the money to pay. That $130,000 in long-term care is in addition to the $270,000 expected for medical care.  

    Some senior housing, apartment and assisted-living communities ask family members to become the responsible party for guaranteeing payment of ongoing care. That puts family members, especially adult children, in a very difficult position financially because you don’t know how much it will cost and how long you will be paying.

    Nursing homes are prevented from asking for the same kind of commitment, unless you have power of attorney over your parents.

    The best advice is to read the fine print carefully and avoid signing any agreement that makes you a guarantor.  

    Settling Secured Debt

    Secured debts, such as a car loan or a mortgage, that are owed after the account holder’s death are not the children’s responsibility.

    The lienholder will either reclaim the property or a relative can assume responsibility for the debt through refinancing. The same is true with most reverse mortgages — you can refinance the loan if the home has been left to you.

    If you are named executor of an estate, it’s important to seek legal advice before paying any money out. If pressured by creditors, remind them that debts are paid in accordance with the laws of your state. Do not promise to pay out of your own pocket, as it is not your responsibility unless you signed your name on the loan or account.

    Since a high debt load can cut into the inheritance, it is vital that senior citizens review their financial portfolios, retirement savings and obligations and avoid co-signers if possible.

    And survivors should remember that debtors get paid first and will want all assets liquidated to make that happen. What is left over is split among the heirs.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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