Even after death, most personal debts you have do not disappear, and the burden can fall on your estate and affect the gifts that you intend to leave your loved ones. Here, the will and estate planning attorneys at Rodier Family Law detail how your debts could impact your estate planning and what you can do about it.
What are the Types of Debt You Can Leave Behind?
If you die with debt, it does not mean that it is your family’s responsibility to pay off the debt. However, your executor will have the responsibility of ensuring that your debts are taken care of before your property and assets can be granted to those named in your will. This means that your assets will go to creditors before your beneficiaries.
Below is a list of the different types of debt your estate may be responsible for as well as how it impacts your beneficiaries:
Secured debts are secured by collateral, which means that the risks associated with lending are reduced. Common forms of secured debt include mortgage loans, car loans and deeds of trusts. Secured debts give a creditor the ability to take property as security for any debt that is not paid off. In other words, if you die with a mortgage loan that is not paid off, the bank would take back your property and the remainder of your loan would not be taken out of your personal estate. Business debt can also be included under secured debt, depending on the type of business enterprise. For example, if you own a limited liability company (LLC) or corporation, the business’s creditors can merely consider the assets of your business. If you own a sole proprietorship, any debts you have after death may go through probate as an element of your estate, and they will be treated as personal debt.
Unsecured debts include any debts that are not attached to property and can include medical bills, credit card bills and other private debts. These debts are paid out of your estate before your assets are granted to your beneficiaries. This can impact the amount of assets that are passed down to your beneficiaries, depending on the amount of unsecured debt that remains after death. Unsecured debt or personal debt that remains on a credit card or in the form of a loan can significantly reduce or even eliminate the gifts that you were intending to leave your loved ones.
How Can I Protect My Estate From My Debts?
If you have outstanding debts that threaten to impact the size of your estate, it is important to take steps to prevent your estate from being designated to cover your creditors’ claims.
In order to ensure your estate is not used to pay off your debts and instead goes straight to your beneficiaries, you can name an individual beneficiary on IRAs, brokerage accounts, life insurance, pensions and other personal policies. In doing so, leaving these types of assets to a beneficiary means they cannot legally be used to pay off your debts and will instead be gifted directly to them. You can also complete a payable-on-death designation for any outstanding debts on bank accounts as well, which will ensure your loved one is still gifted what is left to them. Another way to reduce the impact of your debt on your estate is claiming joint ownership over debt or creating a joint bank account with your partner. If you die with a joint bank account that you share with your beneficiary, your funds will be immediately granted to them. Lastly, you can prevent your debt from severely impacting your beneficiaries by purchasing life insurance. In doing so, the life insurance payout will go directly to your beneficiaries and can also help a loved one inherit your property or vehicle even if they are not fully paid off.
Discuss Your Options with a Will and Estate Planning Attorney at Rodier Family Law
The last thing we want when meticulously planning our estate and gifting our assets is to find out significant debts may drastically reduce or eliminate our estate. Even though debt does not disappear, even after death, there are processes to ensure a portion of your estate can still be gifted to a beneficiary and not claimed by creditors. For more information on how a dedicated will and estate planning attorney can examine your individual case and help you decide what the next step should be, contact Rodier Family Law today.