Death and Debt: They Don’t Disappear Together


Perhaps one of your proudest personal achievements is to pass on your wealth to your heirs, especially to your children. You toiled with sweat, blood, and tears for years for your loved ones. In case you die, you won’t have to worry. Your beneficiaries will enjoy the fruits of your labor — but will they?

There’s a good reason why financial planners emphasize estate and asset protection planning. Remember: Debts don’t die with you.

How Do You Pay Debts When You Die?

Many people believe that their financial obligations such as a mortgage or creditor debt can go with them to the grave. Instead, the responsibility passes on to something else: your estate.

An estate refers to the group of assets owned by the deceased. Usually, your beneficiaries such as your immediate family members will inherit them. The process is not automatic, however.

First, your beneficiaries have to pay an estate tax. Fortunately, the tax exemption in the United States is high. As of 2019, it’s already $11.4 million. Unless your total assets exceed this amount, your heirs don’t have to pay anything to the IRS when it comes to estate tax.

Second, it doesn’t mean they’re going to get it in full. Your estate will then be responsible for paying your unpaid bills, such as creditor claims. If you’re running a sole proprietorship, you may even have less protection of your assets. It means that your creditors can run after not only your business, but also personal assets. These can already include your home or vehicles.

Depending on how much debt you have, it’s possible only a significantly less amount goes toward your heirs. In some cases, they won’t receive any. In fact, your estate won’t be enough to cover your debts.

Exceptions to the Rule

making a deal

Fortunately, rules tend to have exceptions. For example, creditors cannot coerce children to pay off their parents’ loans unless they are co-signatories. They may run after certain assets like property if the parents transfer it fraudulently.

Depending on the state, healthcare facilities such as hospitals cannot compel children to pay off their parents’ medical debt. According to the law, student debt disappears once the person dies.

In the end, though, you don’t want to place your loved ones in a tight spot. Worse, it’s a situation where you’re no longer around to help. To avoid it, don’t forego proper financial planning, especially estate planning. Usually, the strategies involve the following:

  • Sufficient life insurance coverage (the amount may be equal to or more than your total assets and unpaid debts)
  • Business insurance coverage, which can protect your assets against creditor claims
  • Addition of heirs such as children as beneficiaries to your pension
  • Drafting of a will and testament (and updating it when necessary)
  • Determination of an executor to lessen the hassle and burden on your beneficiaries or heirs

Debts don’t die with you, but you shouldn’t pass these on to your heirs either with decreased inheritance or estate. Get your affairs in order while you still can. Discuss financial planning with an expert today.

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