Laura reviews what happens to your assets and debts after your death, depending on your estate, marital status, and home state.
Laura reviews what happens to your assets and debts after your death, depending on your estate, marital status, and home state.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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When you or a loved one dies, there are many logistical and financial tasks that must be completed. If you've ever wondered what happens to your money, retirement accounts, property, and debt after you die, this post will review what you need to know.
Welcome back to episode 910 of Money Girl! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, founder of The Money Stack, a Substack newsletter, and host of this podcast with over 43 million downloads.
If you enjoy the free content we love creating for you, please take a moment to rate and review the show in your podcast app! If you have a question about money, leave it on our voicemail at 302-364-0308. You can also visit LauraDAdams.com to email me and learn more about my books, courses, and the free Money Stack newsletter.
What is an estate?
After you die, everything you leave behind becomes a legal entity called your estate. It's your net worth at death, including all your cash, financial accounts, real estate, other assets, and personal belongings, regardless of being worth a little or a lot. What happens to it depends on whether you die with or without a last will and the state where you lived.
Every estate must have a named executor whose job is to protect your assets, distribute your property, pay your outstanding bills, and settle your debts, like taxes, loans, and credit cards. We'll review more about debt after death in a moment.
If you don't create a last will and name someone as your executor, a court will appoint one for you. The problem is, they likely won't be someone you know and may not carry
out your wishes as you would have liked.
Therefore, if you don't have a will, prioritize creating one. You can hire an estate planning attorney or use online resources like Trust & Will or Rocket Lawyer.
LISTEN ALSO: Does my inheritance count as taxable income?
What happens to debt after you die?
If there isn't enough money in a deceased person's estate to pay what they owe, the executor must sell as much of their property as possible to cover it. For instance, if you don't have enough to pay off a credit card, your executor could sell your car to raise cash–even if you wanted to leave it to your sister.
However, in most states, certain assets, such as funds in tax-advantaged retirement accounts, are safe from liquidation to pay creditors. Therefore, if you name your spouse or child as your 401(k) beneficiary, they would receive the money, even if your estate was insolvent.
Creditors also can't go after property or cash that goes directly to someone else when you die, such as the beneficiary of your life insurance. Those funds belong to your beneficiary and not your estate after your death.
After your executor pays your debts, they distribute the balance of your estate assets to any beneficiaries listed in your will, if you have one. For instance, let's say you have a home with a mortgage, and your will says it goes to your son. If you die and he accepts the property, he will be responsible for the mortgage payments.
A federal law called the Garn-St. Germain Depository Institutions Act allows a close relative who inherits a property to assume payments on the mortgage without triggering a due-on-sale clause. In other words, your son could title the home in his name and make payments, even if the mortgage remains in your name after your death.
However, if someone inherits your real estate and can't afford its expenses–like a mortgage, homeowners insurance, property taxes, homeowners association dues, and maintenance–they would need to sell it.
RELATED: Am I saving enough for retirement?
What happens to an insolvent estate?
But what if there are more debts than assets in the estate and some creditors can't be paid off? Your creditors are generally out of luck if there isn't enough cash or property to cover your debts.
That should put your mind at ease if you've been worried about any family members who are racking up debt. If someone's estate can't cover the debt in their name only, creditors can't try to collect it from their family.
The federal Fair Debt Collection Practices Act prohibits collectors from using abusive or deceptive tactics to collect a debt; however, they may still try. So, knowing your rights is essential when a deceased family member has unpaid debt.
Creditors have a limited period, such as up to six months, to make a claim against an estate. As I mentioned, if it has no money, creditors have been known to prey on relatives, hoping they'll feel duty-bound to pay up. Remember, the deceased person's estate is typically responsible for their debts, not you.
However, an exception known as filial responsibility applies in particular states that may obligate adult children to pay for a deceased parent's unpaid medical debts when their estate can't cover them. However, whether they apply depends on factors like a parent's age and a child's financial situation.
LISTEN ALSO: How to stay safe from zombie debt
What happens to cosigned debt after you die?
The rules for cosigned debt are different because the death of a co-signer doesn't eliminate your obligation to pay it. Even if you never charged a dime on a joint credit card or didn't drive a car with a cosigned loan, you're legally responsible for 100% of the debt. That's why cosigning should never be taken lightly.
One terrible situation that many people don't think about is cosigning a student loan with a child who dies. In that case, the parent must pay their deceased child's entire loan. One solution is getting an inexpensive term life insurance policy for the student. That would give a parent the funds to repay a cosigned loan.
Note that being an authorized user on a credit card is different from cosigning. For instance, if you're an authorized user on your dad's credit card and he passes away, you're not responsible for the debt, even if you made many charges.
So ensure you're clear about your card ownership status if a debt collector comes
knocking. Unless you're a co-signer on someone's account, their debts are not your problem.
What happens to debt after a spouse dies?
When you're married, what happens after the death of a spouse depends on whether you live in a common law or a community property state. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, spouses can opt into the community property system.
In community property states, money earned and property acquired by either spouse during the marriage is owned equally by both of you. Likewise, your debts are shared.
So, even if your spouse had a secret credit card in their name only, you'd generally still be responsible for the debt in a community property state.
However, property and debt you owned before the marriage are not considered community property. For instance, if you took out a student loan before getting married, your spouse wouldn't be responsible for it if you died. Also, you can sign a legal document like a pre- or postnuptial agreement separating some or all of your community property.
However, debts of one spouse in common law states do become the responsibility of both spouses if one uses the funds for the benefit of the marriage or family. For instance, if one spouse used credit card debt to pay for housing, food, or childcare.
But if a deceased spouse's name is on a credit card that you didn't know about or on a car loan and title, you likely wouldn't be responsible for it. However, how debts get treated can vary slightly, even among common law states. There may be some instances where you could be responsible for one-half of a debt owed by a deceased spouse instead of the full amount.
5 points about debt and death
To summarize, you should know the following five points about debt and death.
1. Family and friends don't inherit debt.
With only a few exceptions, such as being a co-signer and the filial responsibility laws for medical debt I mentioned, family members are not responsible for a deceased person's debts.
2. Authorized credit card users don't inherit debt.
Unlike a co-signer, being an authorized credit card user means you're not liable for the primary cardholder's debt.
3. Community property states handle debt differently.
If you're married and live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and if you choose it, Alaska), you can be liable for your spouse's debts, even if you didn't agree to them or know about them.
4. Some creditors may not get paid.
When a deceased person leaves more debts than assets in an estate, creditors may not get paid.
5. Debt collectors can't harass you.
If you're not in charge of an estate and get contacted by a collector for a debt you don't owe, you can tell the caller that you don't want to be contacted again about that debt.
If you need help planning your estate, managing one for a deceased family member, or have questions about debt, speak with an attorney in your state for help.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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