Planning After Death

Do you know what happens to your outstanding debt after you die? You might be surprised to learn that it is not as straightforward as you may have thought.

Remember that certain assets, such as life insurance proceeds, retirement and annuity accounts and certain brokerage accounts are not included in the value of your estate. You cannot be forced to use those assets to pay off your debts. As a result, the value of your estate may not be as great as you think.

Your executor will review the assets and liabilities in your estate and prioritize the liabilities according to some pretty straightforward rules. For example, certain creditors like medical providers and mortgage holders are generally paid first. For the remaining liabilities, a probate court will decide the order these liabilities are paid, unless there are clear instructions in your will.

Mortgage debt usually passes to the spouse or partner whose name is also on the loan documents. If there is no joint mortgage holder, and the estate does not have sufficient funds to pay off the debt, the person inheriting the home can usually move in and resume making the mortgage payments. Home-equity loans follow different rules. Banks can demand that the person inheriting the home (and the loan) immediately replay the amount outstanding. With that said, in many cases, the bank will allow the heir to make the continuing payments.

Auto loans work similarly to mortgages. If funds are available, the estate will pay the remaining balance. If not, the person inheriting the car has the option to continue making payments or selling the vehicle to re-pay the loan.

For credit cards, any joint account holder is liable for the debts after the co-account holder dies. If there is no joint account holder, only the estate is responsible for paying the outstanding debt. Spouses who live in community property states may or may not be liable for the outstanding debt.

Student loans are typically paid out of the estate, but if those funds are not available, the loan provider cannot force anyone else to pay off the loans, since they are unsecured. However, if there is a co-signer for the loan, that person is liable for repaying the debt. Similar to credit cards, a spouse in a community property estate may be liable for student loans incurred during the marriage.