The main purpose of a will is to direct where your assets will go after you die, but it can also be used to instruct your heirs on how to pay your debts. While generally heirs cannot inherit debt, an estate’s debt can reduce what they receive. Spelling out how debt should be paid can help your heirs.
If someone dies with outstanding debt, the executor is responsible for making sure those debts are paid. This may require selling assets that you would have preferred to leave to specific heirs. There are two types of debts you might leave behind:
- Secured debt is debt that is attached to a piece of property or an asset, such as a car loan or a mortgage.
- Unsecured debt is any debt that isn’t backed by an underlying asset, such as credit card debt or medical bills.
When you leave an asset that has debt attached to it, to your heirs, the debt stays with the property. Your heirs can either continue to pay on the debt or sell the property to pay off the debt. If you believe this would cause a burden for your heirs, you can leave them assets in your will specifically designated to pay off the debt.
In the case of unsecured debt, although your heirs will not have to pay off the debt personally, the executor will have to pay the debt using estate assets. You can specify in your will which assets to use to pay these debts. For example, suppose you have a valuable collectible that you want one of your heirs to have. You can specify that the executor use assets in your bank account to pay any debts before selling the collectible. If you want to leave certain liquid assets, like a bank account, CD, or stocks, to an heir, you should designate in your will what you would like your executor to use instead to satisfy debts.
Not everyone needs to spell out how to pay debt in a will. If your debt is negligible or your entire estate is going to just one or two people, it may not be necessary, but contact your attorney to formulate a plan.