When my parents die, will I inherit their debt?
The passing of your parents will be a hard and painful time, and the various money and property concerns that go along with it can be an added source of stress. If you have debt collectors call you after the death of your parent, you might be left feeling like your best option is to repay the debts and make it end as quickly as possible. This, however, is the wrong attitude to take. With very few exceptions, you are not responsible for paying off your parent’s—or any relative’s—debt.
What are my rights?
After a family member dies, creditors will be notified of their death. Creditors will file a claim for repayment of any outstanding debt of the deceased person to their estate. The first things to be paid off by the estate are funeral expenses, state and federal taxes and administrative fees (for administering the estate). Second, debts like loans and mortgages have a primary right to assets. Afterwards, credit cards will be able to collect from the estate. It is possible that the estate will not have enough money to pay off all these debts, in which case creditors outsource the dirty work of getting their money back to debt collectors.
Debt collectors will attempt every trick in the book to make you feel responsible for a parent’s debt. They will attempt to make you feel guilty as well. According to the Federal Trade Commission (FTC), the national consumer protection agency, a surviving relative usually has no legal obligation to pay the debts of a family member who has died. The three exceptions are: if you co-signed a loan (or jointly filed for a credit card) with the deceased, are a widow/widower in a “community property” state such as California, or are the executor of the will (but even then you are not responsible for repaying out of your own pocket).
If you are the spouse of someone who dies, in most cases you will not be responsible for their debt. However, if you live in a community property law state, debts of deceased people do pass to surviving spouses and hold them responsible for repayment. The 10 states with such laws are: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
The only people who do have a legal obligation to reconcile the debts of deceased people with creditors, if the exceptions above do not apply, is the executor (or administrator) of their estate. If you are named the executor of the estate, you are not responsible for paying the debts personally. But you will have to sell off the deceased’s assets and property in order to pay the debts to the estate’s best ability. If the estate runs out of money to pay off debts, that’s bad luck for the creditors, and they’ll have to write it off as a loss.
Talking to your parents about their death, debt and assets can be tricky and feel uncomfortable, but in order to protect everyone involved it is extremely necessary. Talk with them to make a good estate plan. There are many estate-planning professionals that can help the family prepare for what will happen. The professional may recommend opening an Irrevocable Trust, which is a trust that can’t be modified or terminated without the permission of the beneficiary (you). The grantor (your parents), having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust. Therefore, the money in the trust isn’t subject to being collected by creditors when your parents’ estate is liquidated. Gifting is also sometimes used as a way to make sure heirs get money, not creditors. The rules may change in 2013, but as of now, an individual can gift up to $5 million before being taxed.
But remember that individual circumstances vary—check with a professional and think carefully about whether Irrevocable Trusts and/or gifting are right for your family.
No matter what you do, however, debt collectors will try to get any amount of money from you that they can. You can simply hang up on anyone who calls, or you can write a letter to them requesting that they no longer contact you. In the event that you do send them a letter, send it certified mail and pay for a return receipt, which will document when the collection agency received the notice. If in the event that you feel you are being harassed by debt collectors file a complaint with the FTC.
Funeral image via Shutterstock.