The following is an article from the March 2018 issue of "Get Your Ducks in a Row" Carolina Family Estate Planning's free newsletter. You can read the rest of the issue, as well as back issues of our newsletter online at www.carolinafep.com/library/newsletters/ or subscribe for free at www.carolinafep.com/newsletter.cfm
Most people will die with at least some debt to their name. The average total balance of debt for U.S. consumers in 2016 was $61,554, according to credit bureau, Experian.
What happens to these debts when you die?
In short, debt incurred by you belongs to your estate. When you die with enough assets to cover your debts, your creditors will be paid first. After your creditors are paid, your beneficiaries will receive what is left over.
If there isn’t enough to cover your debts, creditors may get some, but not all, of what they're owed. State law provides an order of priority for the order in which debts are to be settled if there are not enough assets to settle all of the debts. Family members generally don't become legally responsible for a deceased loved one's debt, but many worry they might.
There can be complex factors, though, depending on the type of debt incurred, where you live, and the value of your estate.
· Federal student loan debt is eligible for cancellation upon death, but private student loan companies typically won't offer the same benefit and may go after a deceased borrower's estate for repayment.
· If your home is your only asset and other people still live in it, that asset must still be used to satisfy your debts—whether it's the mortgage or a large amount of credit card debt. The people who live there may have to assume the mortgage or sell the home to pay off your creditors.
· Debts incurred by you with co-signers or co-applicants can also result in those debts falling back onto someone else's lap (e.g., the other co-signers or co-applicants).
· If you are married and live in a community property state, then you might be responsible for debt of your spouse incurred during the marriage, even if it was only in your spouse's name.
· Some states, including North Carolina, take the marriage vow of “in sickness and in health” to heart and hold spouses responsible for each other’s medical bills and medical debts.
How to Protect Beneficiaries
Here's the core message we share with our clients: Estate planning is not just about you or what you want to have happen when you die—it’s also about protecting those you leave behind.
An experienced estate planning and asset protection attorney can help you assess your and your beneficiaries’ exposure to debts and creditors and help you develop a plan to provide as much asset protection as reasonably possible to you and your beneficiaries.
If you’d like to explore asset protection options for you and your loved ones, please call us at 919-694-4467.