What to do when your inheritance is made up of debt

Inheriting Debt

When people think of being on the receiving end of someone’s estate, they usually think of the assets. But almost everyone has a few debts and many actually die owing more than they have acquired. When this happens, who has to pay? Wills.com will explain how this sometimes-confusing process works! 

Solvent or Not?

The main point here is whether the estate of the person who has passed is solvent or Insolvent. A solvent estate is one that has enough funds to cover all debts and expenses, such as final bills and credit cards. The task of handling this falls to the executor. 


An executor is either pre-chosen or appointed to look after the decedent’s estate and to take it through the probate process. Part of that job is to first and foremost pay off any final bills and debts accrued before death. If the estate is worth more than the debts, then the heirs would split the remainder according to the wishes set out in the will. If the estate cannot cover unpaid sums, then the creditors jump in to get what they can, leaving the heirs wondering what just happened. 


Probate assets include regular bank accounts, vehicles, houses, and other personal property.  


Who Pays?

What happens when an estate owes far more than the assets can cover? Happily, the debt does not (usually) fall to the kids. 


Children are not held responsible for their parents’ debts unless they were co-signatories on specific things, such as loans or credit cards. Even in these cases, the children are only responsible for clearing that specific debt, not any other.  


When an estate is insolvent, this means quite a bit of work for the executor, who will have to deal with the creditors and negotiate what can and can’t be paid back. When a child is also the executor this can be a tricky balancing act.


Creditors want their money and can become aggressive or manipulative when trying to recuperate losses, but the law states this is not the responsibility of the child, so don’t be bullied or fooled into taking on the additional debt! It’s easy to be lured by wanting to “do the right thing”. Just remember the debt wasn’t yours to start with, so don’t get sucked in with guilt-trips or threats.

Not all Assets are Created Equal

Now here is where things get interesting. Not all assets are considered probate assets. There are also things called non-probate assets and this is how many people protect their money for the next generation. 


Non-probate assets vary in every state, but in general they include joint brokerage accounts, bank accounts with payable or transferable-upon-death beneficiaries designated, retirement accounts, life insurance, or assets that have been held in a trust. These resources are typically not touchable to pay off debt…because as the name states, they do not go through the probate process. 


If a person dies leaving ONLY non-probate assets, then creditors do have the right to file a claim to extract their pound of flesh from the non-probate assets. They may or may not bother to go after the estate depending on the amount owed. 


The basic idea here is to have a will that has been thought out in order to protect loved ones from too much hassle. Debt may not be avoidable, but shielding your heirs from the worst can be!


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