Personal Finance
January 27, 2015

Will Your Kids Inherit Your Debt?

Simple. Thrifty. Living.

If you have unpaid debts at the time of your death, will your children ultimately be accountable to pay them? For many parents, especially those whose debt is substantial, the question is one which can cause significant anxiety. But what does the law say on the subject?

Laws involving debt and inheritance are complex and differ from one state to another, but your children are generally not responsible to pay your debts. There are some exceptions, however. For example, cases in which children are cosigners to a parent’s loan, or those in which parents transfer property to children shortly before their death, and that transfer is deemed an attempt to defraud creditors. And, in some states, children can be held responsible for a deceased parents’ unpaid medical debts.

In virtually all other circumstances, creditors can come after your estate, but not the assets of your adult children. If your estate has insufficient assets to pay off debts, in most instances those debts are wiped out.

In general your children won’t have to pay your debts, but they could see what they receive as inheritance diminish as creditors deplete your assets to cover your debts. Again, the laws involving the impact of parental debt on inheritance are complex.

For example, your pension or IRA can be tapped by creditors to cover debts, and this could reduce the amount of inheritance your children receive. However, you can avoid this eventuality by listing one or more of your children as beneficiaries to your pension.

If you die with credit card debt, your children can’t be forced to pay it. But these debts can be collected from your estate, reducing the amount of inheritance you leave your children.

Debt collection agencies sometimes attempt to persuade adult children that they’re responsible to pay their deceased parent’s credit card debt. The law does not permit them to contact children in an attempt to collect these debts (except in cases in which the child is also executor of the estate), but some will still try to do so. To protect yourself, you and your children should familiarize yourselves with the laws that cover unpaid credit card debt. If you want to pay down your credit card debt, here are some tips on how to do it.

Laws which cover medical debts differ widely from one state to another. In some states, if a parent dies with unpaid hospital bills, for example, these must be covered by any assets contained in the estate and are not the responsibility of children. However, almost 30 states have instituted laws that require children to pay some part of their parent’s unpaid medical bills if there are insufficient funds in the estate.

If you leave your home to one of your children and that home has a mortgage, the mortgage isn’t wiped out. Instead, your child will be responsible for making monthly mortgage payments just as you would have. The good news is that the mortgage lender generally can’t require that your child immediately pay the entire mortgage.

If your child decides to sell the house and discovers it’s “under water” (meaning that what’s owed is more than what the house is worth), he or she can’t be forced to pay any amount not covered by the sale. The bank can, however, tap assets from the parent’s estate to pay off the difference.

Your children will not be held responsible for income or property taxes owed at the time of your death. Unpaid taxes become the responsibility of the estate, assuming there are sufficient assets to cover them.

It’s understandable that you might feel stress at the prospect of passing on with significant unpaid debts. But you can rest easy that, with few exceptions, your children will not inherit your debt. For added peace of mind, however, you might want to check with an experienced estate attorney to help you navigate the often-complicated laws which govern debt and inheritance.

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