John Johnson managed all his family’s finances. His wife, Elaine, never got involved in paying bills or reviewing bank accounts. John and Elaine were in their 50s with one child in college and two in high school. When John died, he left behind a lot of unexpected debt — and an enormous amount of worry for Elaine.
Elaine expected some of the debt, such as the mortgage on the house and the car loan. But she was shocked to discover that John’s credit card carried a $25,000 balance, that he had taken out a high-interest business loan for $15,000 and had borrowed an additional $10,000 from a friend. Elaine, already suffering grief over his loss, was faced with stress and anger at the realization that his estate would have to satisfy these debts.
Debt Repayment Planning and Management
No matter if the debt is as substantial as $50,000 or even just a few thousand dollars, leaving debt to be paid from your estate creates unnecessary disruption and fear. However, there are mechanisms provided in estate planning and estate management to help families address estate debt.
The Role of a Will in Debt Payment
A Will is traditionally seen as a means to distribute assets posthumously. However, it also plays a crucial role in managing debts left behind. While heirs do not inherit debt (unless they themselves were responsible for incurring the debt with the decedent, as in the case of two persons having access and use of a credit card, for example), the estate’s debt can impact their inheritance. Clearly outlining debt payment in a Will can significantly aid heirs in this process.
Responsibilities of the Executor in Debt Settlement
When someone dies with outstanding debts, the executor must settle these obligations before any distributions to beneficiaries are made. This often involves liquidating assets, which might affect what specific heirs receive. Understanding and preparing for this is crucial in estate planning.
Differentiating Between Secured and Unsecured Debt
There are two types of debt that are managed differently after death:
- Secured Debt: Attached to an asset, like a mortgage or car loan, a secured debt remains with the property. The beneficiaries of the property may have to decide how to manage this debt if they want to preserve the real property. Often, beneficiaries must sell the property to pay-off the debt.
- Unsecured Debt: Examples would be a credit card debt or medical bills. The executor must notify the creditors of his/her appointment and, after the creditor files a valid claim against the estate for the debt owed, the executor must satisfy the debt from estate assets before making distributions to any beneficiaries.
Strategies for Allocating Assets to Settle Debts
If John had proactively planned, he could have prevented his debts from becoming a burden by designating assets in his estate plan to pay for the debt. For instance, he could have directed the executor to use funds from a bank account to pay debts, thereby preserving more sentimental or valuable assets for his heirs. A Will can also clearly state how liquid assets like bank accounts, CDs or stocks are to be handled, ensuring debts are paid without compromising specific bequests to heirs.
Detailing how to manage debt in a Will is not always necessary. It becomes essential when the debt is significant or the estate is distributed among multiple heirs. Consulting a trusted estate planning attorney for personalized advice is always recommended.