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When a loved one passes away, not only can it take an emotional toll, but it can also be incredibly stressful. Grieving family members must make funeral plans, write and publish an obituary, clean up the deceased's residence, and field calls and visits from concerned friends and family.

The last thing anyone wants after burying their loved one is to inherit their debt. In this article, we'll discuss how debt is treated when someone dies and how you can reduce the chance of passing on your obligations to your family members.

Can I Inherit Debt From My Parents?

Generally, you will not inherit most of the debt of a deceased parent. However, before you receive any assets from their estate, the executor will need to pay off valid debts using your parents' property. If no funds are remaining after the debts are paid, you will not receive anything beyond what is directly payable to you as a beneficiary.

Two exceptions where you may inherit your parents' debt are medical bills and co-signed loans.

Co-signing a loan means that you guarantee you will repay the debt in full if the primary signer fails to complete repayment. If you co-signed a loan for anyone and they pass away, you will be on the hook for the remainder of the loan.

The second area you can inherit your parents' debt has to do with state law treatment of medical bills. If your parents' state has enacted filial responsibility laws, you may end up being responsible for your parents' nursing home or long-term care bills.

Can Inherit Debt From My Children?

The amount of debt that most people carry has grown significantly over the past few decades. If you have adult children with a high-debt load, you may worry about covering their debts in the event of their untimely death. As with all estates, the available assets will be decreased by any obligations needing to be paid. If there are remaining debts, they generally die with the deceased.

However, parents often co-sign loans for their children. If you co-signed a loan and your child dies, you will likely be responsible for the balance due. Student loan debts might be dischargeable upon the recipient's death if the government secured the loan. However, co-signed private student loans will not be eligible for this benefit.

Can I Inherit Debt From My Spouse?

If you have any joint or co-signed loans you took out with your spouse, you will be responsible for their repayment after your spouse dies. Whether you are liable for your spouse's other debts will depend on the property laws of your state.

If you live in a community property state, any debt your spouse added during the marriage can be passed on to you unless you signed a pre-nuptial or post-nuptial legal document to keep your assets separate.

Community property states include:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

The remaining states are considered separate property states. Any debt your spouse accrued without you as a joint signer is owed by their estate. It will not transfer to your name when they die.

Probate and Non-Probate Assets

Usually, transferring as many of your assets directly to your descendants outside of probate is desired. Non-probate assets — those with designated and living beneficiaries — can be conveyed as soon as the financial institution receives a valid death certificate.

Non-probate assets include:

  • Life insurance policies
  • Annuities
  • Retirement accounts such as IRAs and 401ks
  • Jointly-owned assets
  • Assets with pay-on-death designations
  • Certain trusts

All of your assets that are not jointly owned or designed to avoid probate will transfer to your estate. These probate assets will be used to pay off any debts you had when you passed.

If there are still assets remaining after your debts are repaid, your estate is considered solvent. A solvent estate will transfer any remaining assets to your heirs and beneficiaries through probate. The distribution will be based on your will or your state's laws if you die without a will.

Settling an Estate and Order of Payment

When someone dies, all of their assets and debts are referred to as their estate. Legally, your estate survives you and will be handled by your chosen executor, who should be a trusted family member, friend, or professional. The executor is responsible for settling your affairs and carrying out your last wishes.

Generally, when you die with debt, the executor will need to pay off your debts using your assets before distributing any remaining funds. Determining which creditors come first is known as the order of payment.

All secured debts, such as mortgages and auto loans, must be paid first. If estate assets are insufficient to cover the balance of the mortgage, the bank may be able to foreclose on the house.

After secured debts, the order of payment for estates generally proceeds as follows:

  1. Estate taxes and fees
  2. Attorney and executor fees
  3. Funeral expenses
  4. IRS and state or local taxes
  5. Outstanding medical expenses
  6. Property taxes owed on the estate's assets
  7. Credit card debt and other unsecured personal debt

A brief examination of exactly how some common types of debts are treated after your death follows.

Credit Card Debt

Credit card debt is typically the last debt an estate needs to pay. Except for community property states, you will not inherit the debt unless you opened the credit card as a joint owner.

Medical Debt

Medical bills are tricky because at least 30 states have filial responsibility laws requiring children to pay certain medical debts of their deceased parents. Most of these laws are vague, and enforcement varies widely. Typically, an adult child can be responsible under these laws to cover the costs of food, clothing, and other necessities for their parents in a nursing home or long-term care setting. Consult with an attorney to determine what responsibilities you may have for your parents' medical care.

Mortgage Debt

If you have a joint mortgage with your parent, child, or spouse, you will owe the balance on the mortgage upon their death or risk losing the home. If the mortgage was only in the deceased's name, the estate could continue mortgage payments while seeking to sell the house. However, foreclosure is a risk if the estate does not have the necessary assets to cover a mortgage's costs.

Taxes

An estate will need to pay off any remaining tax bills before being settled. During probate, the estate will also be responsible for property taxes on any assets it owns. Generally, tax debt will not pass to survivors.

Students Loans

If you pass away still owing student loans, their repayment will depend on whether the loan was private or secured by the government. Many government loans, such as PLUS loans, are dischargeable upon death.

Private student loans will need to be paid by the estate, with their order of payment coming at the same time as credit card debt. However, remember that co-signed loans will generally survive and need to be paid by the co-signer.

Why Estate Planning is Important

A solid estate plan can include an array of legal documents: from a will to a power of attorney. While estate planning may seem overwhelming, you can start your estate plan today by quickly and easily creating a power of attorney using our contract maker.

How you structure your wealth is vitally important for ensuring your loved ones receive what you worked so hard to build. Estate planning can align your assets to avoid probate and pass them directly to your beneficiaries. Even those assets which must go through probate can be arranged so that you minimize losses paying off your debts.

Smart estate planning is crucial to avoid leaving your family with less than they anticipate. Worse still, poor planning could lead to you giving your loved ones a debt they did not expect.

Find Your Estate Planning Documents

Helpful Resources:
Community Property - IRS
Filial Responsability Laws - NYT
American debt - CNBC

When a loved one passes away, not only can it take an emotional toll, but it can also be incredibly stressful. Grieving family members must make funeral plans, write and publish an obituary, clean up the deceased's residence, and field calls and visits from concerned friends and family.

The last thing anyone wants after burying their loved one is to inherit their debt. In this article, we'll discuss how debt is treated when someone dies and how you can reduce the chance of passing on your obligations to your family members.

Can I Inherit Debt From My Parents?

Generally, you will not inherit most of the debt of a deceased parent. However, before you receive any assets from their estate, the executor will need to pay off valid debts using your parents' property. If no funds are remaining after the debts are paid, you will not receive anything beyond what is directly payable to you as a beneficiary.

Two exceptions where you may inherit your parents' debt are medical bills and co-signed loans.

Co-signing a loan means that you guarantee you will repay the debt in full if the primary signer fails to complete repayment. If you co-signed a loan for anyone and they pass away, you will be on the hook for the remainder of the loan.

The second area you can inherit your parents' debt has to do with state law treatment of medical bills. If your parents' state has enacted filial responsibility laws, you may end up being responsible for your parents' nursing home or long-term care bills.

Can Inherit Debt From My Children?

The amount of debt that most people carry has grown significantly over the past few decades. If you have adult children with a high-debt load, you may worry about covering their debts in the event of their untimely death. As with all estates, the available assets will be decreased by any obligations needing to be paid. If there are remaining debts, they generally die with the deceased.

However, parents often co-sign loans for their children. If you co-signed a loan and your child dies, you will likely be responsible for the balance due. Student loan debts might be dischargeable upon the recipient's death if the government secured the loan. However, co-signed private student loans will not be eligible for this benefit.

Can I Inherit Debt From My Spouse?

If you have any joint or co-signed loans you took out with your spouse, you will be responsible for their repayment after your spouse dies. Whether you are liable for your spouse's other debts will depend on the property laws of your state.

If you live in a community property state, any debt your spouse added during the marriage can be passed on to you unless you signed a pre-nuptial or post-nuptial legal document to keep your assets separate.

Community property states include:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

The remaining states are considered separate property states. Any debt your spouse accrued without you as a joint signer is owed by their estate. It will not transfer to your name when they die.

Probate and Non-Probate Assets

Usually, transferring as many of your assets directly to your descendants outside of probate is desired. Non-probate assets — those with designated and living beneficiaries — can be conveyed as soon as the financial institution receives a valid death certificate.

Non-probate assets include:

  • Life insurance policies
  • Annuities
  • Retirement accounts such as IRAs and 401ks
  • Jointly-owned assets
  • Assets with pay-on-death designations
  • Certain trusts

All of your assets that are not jointly owned or designed to avoid probate will transfer to your estate. These probate assets will be used to pay off any debts you had when you passed.

If there are still assets remaining after your debts are repaid, your estate is considered solvent. A solvent estate will transfer any remaining assets to your heirs and beneficiaries through probate. The distribution will be based on your will or your state's laws if you die without a will.

Settling an Estate and Order of Payment

When someone dies, all of their assets and debts are referred to as their estate. Legally, your estate survives you and will be handled by your chosen executor, who should be a trusted family member, friend, or professional. The executor is responsible for settling your affairs and carrying out your last wishes.

Generally, when you die with debt, the executor will need to pay off your debts using your assets before distributing any remaining funds. Determining which creditors come first is known as the order of payment.

All secured debts, such as mortgages and auto loans, must be paid first. If estate assets are insufficient to cover the balance of the mortgage, the bank may be able to foreclose on the house.

After secured debts, the order of payment for estates generally proceeds as follows:

  1. Estate taxes and fees
  2. Attorney and executor fees
  3. Funeral expenses
  4. IRS and state or local taxes
  5. Outstanding medical expenses
  6. Property taxes owed on the estate's assets
  7. Credit card debt and other unsecured personal debt

A brief examination of exactly how some common types of debts are treated after your death follows.

Credit Card Debt

Credit card debt is typically the last debt an estate needs to pay. Except for community property states, you will not inherit the debt unless you opened the credit card as a joint owner.

Medical Debt

Medical bills are tricky because at least 30 states have filial responsibility laws requiring children to pay certain medical debts of their deceased parents. Most of these laws are vague, and enforcement varies widely. Typically, an adult child can be responsible under these laws to cover the costs of food, clothing, and other necessities for their parents in a nursing home or long-term care setting. Consult with an attorney to determine what responsibilities you may have for your parents' medical care.

Mortgage Debt

If you have a joint mortgage with your parent, child, or spouse, you will owe the balance on the mortgage upon their death or risk losing the home. If the mortgage was only in the deceased's name, the estate could continue mortgage payments while seeking to sell the house. However, foreclosure is a risk if the estate does not have the necessary assets to cover a mortgage's costs.

Taxes

An estate will need to pay off any remaining tax bills before being settled. During probate, the estate will also be responsible for property taxes on any assets it owns. Generally, tax debt will not pass to survivors.

Students Loans

If you pass away still owing student loans, their repayment will depend on whether the loan was private or secured by the government. Many government loans, such as PLUS loans, are dischargeable upon death.

Private student loans will need to be paid by the estate, with their order of payment coming at the same time as credit card debt. However, remember that co-signed loans will generally survive and need to be paid by the co-signer.

Why Estate Planning is Important

A solid estate plan can include an array of legal documents: from a will to a power of attorney. While estate planning may seem overwhelming, you can start your estate plan today by quickly and easily creating a power of attorney using our contract maker.

How you structure your wealth is vitally important for ensuring your loved ones receive what you worked so hard to build. Estate planning can align your assets to avoid probate and pass them directly to your beneficiaries. Even those assets which must go through probate can be arranged so that you minimize losses paying off your debts.

Smart estate planning is crucial to avoid leaving your family with less than they anticipate. Worse still, poor planning could lead to you giving your loved ones a debt they did not expect.

Find Your Estate Planning Documents

Helpful Resources:
Community Property - IRS
Filial Responsability Laws - NYT
American debt - CNBC