Even though estate planning is typically associated with arrangements for distributing assets upon death, it’s a wise idea to consider debts too. Financial obligations do not automatically evaporate when we die, and sorting out what is owed, and to whom, can become quite a challenge and burden for loved ones. In addition to keeping debt from getting out of control, it’s wise to organize account information and arm the executor of your will with it. Read on for pointers.
Debts Before Assets
Upon death, our debts must be resolved before any assets can be distributed. When it comes to sorting out the debts that must legitimately be paid out of the estate of the deceased, probate court protocols, though often seen as a nuisance, can be very useful. What if more is owed then the estate has in assets? What if the estate is insolvent? Are all the debts actually valid? Through the public process of probate, the court works to ensure fairness in resolving the debts of the deceased, and distributing the remaining assets: “With numerous potential claimants to an estate, transparency is essential. By granting public access to wills, individuals with legitimate claims, such as creditors or overlooked beneficiaries, can assert their rights within the designated time frame, governed by state law.”
It is helpful to know that when a will is made, an executor is designated, and this individual ultimately takes responsibility for filing the will in probate court (upon the death of the “testator” who created it). The executor must then work with the probate court to resolve debts before any money or property is given to heirs in accordance with the will. If there is no will, an administrator is typically appointed by the court to oversee the settling of the affairs of the deceased, and once debts are resolved, remaining assets are distributed in accordance with the laws of intestate succession.
The responsibilities that ultimately fall to our executors or administrators can be stressful and time consuming, so it’s wise to get a grip on both debts and assets while time is on our side, as AARP’s Patricia Amend urges: “Create an honest accounting of every liability you have now, or may have in the future, on a spreadsheet, and update it at least once a year. Include your mortgage, credit cards, personal loans, student loans or medical debts, as well as any loans you may have cosigned for others.” Ideally, you should also: make a will expressing plans for assets after death; designate an executor you trust; and periodically update your executor with information about your plans and accounts, including debts, taking these pointers from AARP experts into consideration:
- A person’s financial obligations are not automatically forgiven once they’ve died. According to the Consumer Financial Protection Bureau, in most cases, any unpaid debts are covered by the person’s estate — the total assets owned at death.
- …If you cosigned for a loan, your estate will be responsible. Similarly, if you are a joint account holder on a credit card you will be responsible for any balances on the card.
- Creditors, of course, also have their rights ….“They can file claims in probate…and can sue any of your heirs if they try to bypass the probate process.”
- ”While statutes differ, in your state, a spouse may be responsible for certain debts. For example, the law may require the estate executor or administrator to pay an outstanding bill out of property owned jointly by the surviving and deceased spouse, such as a joint checking or brokerage account.
Note that throughout the probate process, executors must “work in the best interest of all beneficiaries without showing partiality,” because as fiduciaries, they are legally obligated to ensure the affairs of the estate are properly handled, in accordance with the terms of the will–and the law. Given their significant responsibilities, most states require executors to “have bonds to ensure their trustworthy behavior in their roles. These bonds guarantee that all the estate debts will be satisfied and that the remaining assets will be properly distributed to the appropriate heirs.” Information about executor bonds, as well as help obtaining them, and all types of fiduciary bonds, is available at Colonial Surety Company:
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