If you are in the process of getting your end-of-life affairs in order, you may be concerned that your loved ones will become responsible for your debts when you pass away. Before you write your will and settle your affairs, make sure you understand the relationship between debts and death.
What Happens to Your Debt When You Die?
Every time an individual passes away, their will and property go through a process known as probate. During probate, your will must be legally verified. Then, the executor of your estate (the person in charge of settling your affairs) uses your assets to pay any remaining debts. Once your debts have been paid via your immediate assets, the remainder of your estate is granted to your designated beneficiaries.
In short, debts come first, then your will. If your debts outnumber your funds, then both your creditors and your beneficiaries are out of luck.
Are Your Loved Ones Ever Responsible for Your Debts After Death?
No one is ever responsible to pay your personal debt out of their own pocket. However, your loved ones may be partially responsible for your debts in any of the following scenarios.
If you share a bank account with your spouse and you pass away, debts can still be drawn from that bank account.
If a friend or relative co-signs with you for any type of loan, they become responsible to pay that debt in full upon your death.
In some states, up to half of property shared between spouses may be placed toward the deceased spouse’s debt.
Accounts and Benefits that Are Separate from Creditors
Not all of your assets automatically belong to creditors. Items that do not go through probate (and therefore cannot be paid out) include the following.
Assuming your retirement fund was set up through an employer (such as a 401(k)), it is kept separate from your regular bank account and therefore is not considered part of your official assets. It is important to note that if you have simply been keeping your retirement money in a regular savings account, it may be legally required to go through probate.
Life insurance is also separate from your Last Will and Testament, as you do not actually possess the money until you die. Your beneficiary receives your life insurance payout after you die, so it does not go through probate.
In general, POD (payable-on-death) items cannot be seized by creditors since they do not physically belong to you while you are living.
Likewise, creditors cannot seize transferable-on-death items.
Stay Ahead of the Game
Settling an individual’s debts post-death can take time, and it is occasionally a confusing process. Make it easier for your loved ones by staying as organized as possible while you are still alive. Even if you are young and healthy, you should create a written will as soon as you are able. Additionally, gather up important financial information. Storing all end-of-life documents in one place makes probate a much smoother process down the road.
Remember to store the location of your will as well as the physical will itself. Let your family know where they can find your information when necessary to eliminate later confusion.