Dying With Debt: Will Your Children Inherit Your Obligations?
When Lisa Boesen's parents died a few years ago, they left $60,000 in credit card debt. Lisa and her two siblings were surprised, but they had never discussed their parents' finances. Within a month, creditors began aggressively calling. One credit card company, which repeatedly called Boesen trying to negotiate a payment, ended up putting a lien on the house. A year later, the debts were finally paid off, but only after being reduced through negotiation.
"It was a terrible experience," says Boesen, who lives in Texas. "We were already stressed from grieving and managing the estate. Managing debt was an added stressor."
Boesen may not be the only heir who gets this type of surprise. Seniors are piling on debt faster than ever, which means more children will be dealing with creditors upon a parent's death. Nearly 40% of all seniors say they have accumulated debt in their retirement years with no plans to pay it off during their lifetime, according to a survey by CESI Debt Solutions in Raleigh, N.C. For seniors, knowing in advance the debts your heirs will be responsible for paying, as well as informing them about how to deal with creditors, will result in your heirs being able to resolve your debt even while they grieve your loss, experts say.
"Looking forward, (senior-citizen debt) will be a significant issue," says Carrie Coghill, director of consumer education at FreeScore.com. "All creditors need to be paid before money is released to beneficiaries."
Some situations are more complex than others. Where you live and whether anyone co-signed for your credit cards are two of the biggest variables heirs are likely to encounter during the resolution of your estate, experts say. After someone dies, all creditors should be notified, but the similarities among individual debts ends there, they add.
Your daughter won't inherit a credit card bill
One bright spot: Heirs usually won't have to pay off your credit card debt if it's solely in your name. The estate takes care of what is paid, and only your named executor handles the estate, including toting up debts, selling off assets and settling outstanding debts. "How they fall comes down to a probate process," says Coghill, noting that it varies by state.
But what if there's no money left?
"Generally, funeral expenses, taxes and administrative fees are paid first," says Stephen Silverberg, an estate planning lawyer in Roslyn, N.Y. With secured loans such as car loans or mortgages, creditors have primary rights to assets, he explains. And the family may be protected from different types of creditors by state laws, he says. Any money that's left after all those considerations goes to pay unsecured credit card debt.
If there's no money left, credit card companies write off the debt. "If it's a lot of money, nobody will give up," says Ken Rubinstein, a partner at the New York City-based law firm Rubinstein & Rubinstein. "But if the debt is less than $25,000, it's ancient history."
Co-signed loans can be a sticking point
One wrinkle that can complicate the process of resolving debt after your death is whether you have co-signed loans, experts point out. That's because anyone who co-signs a loan is also liable for the debt.
"I have so many horror stories about co-signing," says Kim McGrigg, spokeswoman for the financial counseling and education service Money Management International in Sugarland, Tex. She cautions people against being co-signers, including adult children. "A family should also know its rights," she says. Some family members pay off debts even when they're not liable, because they didn't know or feel pressured, McGrigg says.
"(Credit card companies) will make you feel guilty," says Boesen. "You have to separate the personal from the estate."
Authorized users have a different status than co-signers: They aren't liable for the debt.
Whether you live in a community property state can factor into debt settlement after you die also, experts say. There are 10 community property states: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, debt may be passed to the spouse, but rules vary. "It's very smart to work with an attorney," McGrigg says.
Protecting your assets from creditors
The sweeping Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 offered some protections for heirs. For example, creditors can't keep charging late fees or annual fees during estate settlement. "Creditors must tell executors what amounts are owed as soon as possible," says McGrigg.
Not all monies are vulnerable to creditors. Such ERISA-covered employee retirement accounts as 401(k)s don't pass through the estate; instead, they have named beneficiaries. On the other hand, "IRAs differ by state," says Silverberg.
The best protection of all is having open discussions within a family, so there's "no unexpected shock about debt," says McGrigg. The first question should be: Do you have a document to protect you and your assets?
Boesen also recommends planning ahead. "Make sure there's plenty of money or assets in the estate to address the debts," she says. "Credit card companies do want their money and will outsource (collection) to get the best deal they can get."
One last tip: Let creditors know that within the family there is one contact person. "Contacting other family members to negotiate is (then) considered harassment," she says.
By Constance Gustke
Original Article: Dying With debt: Will Your Children Inherit Your Obligations?