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If you think you’ll be receiving a nice inheritance from your folks, you may want to think again.
Debt, however, is increasing rapidly for American seniors (older than 75).
In fact, check out the statistics below for American seniors today:
So let’s face it, we have to prepare for the time that our folks may no longer be with us – and that means not just preparing emotionally but also preparing financially.
However, you may have to deal with assertive debt collectors who insist you owe your parents’ debt, which is why some base knowledge (which you’ll find in this article), and likely an attorney, will help tremendously.
One thing you do need to keep in mind is that when your parents pass away, their debt doesn’t simply vanish (or else everyone would rack up a bunch of debt and wait for it to go away at death).
When your parents pass away, their debts are now owed by their estate.
Assuming your parents have drafted their estate documents properly, before their deaths, they would have appointed an executor to their estates (or a trustee, assuming their estates passed directly to their trusts after their deaths).
If you want to make sure your parents – and you and your family for that matter – have the proper, and at minimum basic, estate planning documents in place, I would highly suggest to check out Gentreo.
Gentreo provides basic estate planning documents for you and your family for a good price.
These documents include Wills and Trusts.
And trust me, I know exactly what can happen if your folks (or in my case, my grandparents) do not properly prepare estate documents before death.
If your folks (or you) don’t properly prepare for what happens after you pass away, you (the beneficiary) could:
- Lose money
- Lose precious time
- Lose your sanity (jk)
Take a look at this estate flow, assuming both of your parents have passed away:
It’s very important to understand the basics of debt and how debt is paid off when someone passes away.
However, I would always suggest to hire an attorney to help you sort out legal and financial matters during this emotional and turbulent time.
What are your responsibilities after your parents pass away?
You will have several responsibilities – many of which depend on your appointed status after their deaths, which could include one or all of the following:
For the purpose of this article, I’ll only scratch the surface as it relates to your responsibility when your parents pass away.
However, there is one important step that you should keep in mind:
For example, where I live, in Florida, it is state law that it is the estate’s representative (or estate executor’s) responsibility to make a diligent effort to search and notify any known creditor.
If you don’t publish a notice and don’t contact the creditors regarding the death of your parents, then creditors typically have up to 2 years from the date of death to file a claim.
Can you Inherit Debt from your Parents?
There are some instances where you could inherit debt from your parents – and you would be fully responsible for that debt.
Below are some common scenarios where you would inherit debt from your parents:
- You are the cosigner of a loan your parents have taken out
- Long-term care debt
- Joint debts
Now I want you to think about the last time you signed as a joint owner or co-signed a debt:
- Auto loan
- Home loan
- Student loan
- Business loan
- Personal loan
Make sure you are aware of any potential financial drawbacks before your commit to co-signing or.
As you can see from the image above, you could also inherit long-term care debt – or other medical debt – from your parents, which we will review below.
Can you Inherit Medical Debt?
If you feel your parents may rack up some serious medical debt, then there could be a possibility that their medical debt would be passed down to you.
There are 2 major categories where medical debt could be inherited:
- Long term care debt
- Outstanding medical bills
Now, whether you are fully responsible for your parents’ medical debt depends on several factors, including the state you live in (since every state has different laws).
If you’re responsible for your parents’ medical debt depends on whether your state carries a filial responsibility law.
Close to 30 states carry filial responsibility laws, which could make children liable to pay for their deceased parents’ long-term care costs or other medical debt.
Check out this graphic below representing the states with current filial responsibility laws in place:
Although it’s not very common for courts to enforce filial responsibility laws, there have been cases where children were ordered to pay for long-term care and other medical costs, such in a recent 2012 Pennsylvania filial responsibility court case.
What happens if your parents’ estate isn’t big enough to cover all of their debt?
If you feel like your parents fall into the category of owing more than they own (in other words, they have a negative net worth), then their estate is considered to be insolvent.
Here’s what typically happens if your parents’ estate cannot cover their debt:
- Their assets are sold off
- The profits are used to pay debts in order of priority
The order of priority by which debts are paid off typically varies based on your state.
I’ve created a visual for you to see the typical order of priority:
Typically speaking, your parents’ assets (such as the home, car, jewelry, etc.) would be sold and your creditors would use the profits to pay off the outstanding debts.
Can you Inherit Credit Card Debt from your Parents?
One of the few times you would inherit credit card debt from your parents is if you:
- Have a joint credit card account
- Co-signed the credit card
Now, if you are an authorized user with your parents, which is a credit score boosting strategy, in most cases, you will not be held liable for your parents’ credit card debt.
Keeping the priority by which debts are paid off in mind, credit card debt (which is unsecured debt) will be paid off last.
Here are some ways in which the FDCPA protects you:
- Debt collectors are required to validate your debt
- Debt collectors are barred from deceitful practices
- You can regulate the communication with debt collectors
- Debt collectors cannot harass you or use abusive practices
You have rights and you are protected from debt collectors. Don’t forget about that.
If you find yourself to be a co-signor or a joint owner, then you may want to familiarize yourself with some debt-payoff strategies.
Is the family responsible for the decedent’s debt?
In most cases, the decedent’s estate is responsible to pay outstanding debt balances.
The estate itself is handled by the executor, trustee, or representative, who is typically appointed by legal estate documents including wills or trusts.
One of the rare instances, when a family would be responsible for a decedent’s debt, would be if the family is a co-signor or a co-borrower of that debt.
In that case, the debt would be passed on and would have to be paid by the co-borrower / co-signor.
Can you Inherit your Parents’ Mortgage?
Typically speaking, your parents’ estate would pay for their outstanding mortgage balance.
There are several things you can do if and when you inherit a mortgaged home that was originally in the name of your parents:
- Take over the mortgage if you continue to live in the home
- Refinance the mortgage and only place the mortgage in your name
- Sell the property, payoff the outstanding mortgage, and keep the profits (if any)
Now, the majority of home mortgages maintain a clause within the mortgage contract that is known as the “due-on-sale” clause.
There is, of course, an exception to the rule: The Garn-St. Germain Depository Institutions Act of 1982, which permits anyone inheriting mortgaged homes to take over the mortgages.
With the Garn-St. Germain Depository Institutions Act of 1982 you are permitted to take over your parents’ mortgage if you notify your parent’s mortgage lender that you:
- Inherited the home
- Will be living in the home
- Will take over the mortgage payments
You may have to obtain a new deed in your name, however.
Although notifying your parents’ mortgage lender does not necessarily have to be the number 1 priority item on your list, it is very important that you continue to make mortgage payments if you plan to live in their house.
If you don’t make timely and full mortgage payments, your deceased parents’ mortgage lender may pursue action against you and take steps to foreclose the property.
Can you Inherit Student Loan Debt?
Private student loans could be inherited, while federal student debt (debt loaned by the government) cannot be passed on to any beneficiary – or even an estate for that matter.
Upon death, federal student debt is completely forgiven and no longer owed by anyone or any entity.
To make sure the federal student debt is fully forgiven, make sure you:
- Provide a copy of a death certificate to the student loan lender
With every rule, there is an exception and that exception has to do with private student loans.
If your parents held private student loans, then make sure you understand some of the basic concepts of private student loans:
- You may have to pay for their loans if you are a co-signor
- Private loans don’t have the same level of protection as federal loans
- Private loans may not be canceled or discharged after a borrower’s death
Make sure you read the loan contract (or better yet, call the lender) to see if your parents’ debt will be canceled or forgiven upon their death.
If the lender doesn’t cancel the loan, then:
- Your parents’ estate may be responsible for the outstanding loan balance
Keep in mind, if your parents’ estate does not have enough money to cover the student loan, then the loan will likely be discharged.
Related: How to Eliminate Student Debt
Keep in mind that you could inherit debt from your parents if you are a co-signer or a joint owner of a certain debt.
It’s unfortunate for beneficiaries (aka you), but sadly your share of the money will be available last.
Below is a flow chart of when you would be receiving an inheritance:
As you can see, your chances of inheriting debt are very low, it’s just that your chances of inheriting actual cash or other assets are also fairly low.
Can the IRS come After me for my Parents’ Debt?
The truth here is that absolutely, the IRS can come after you if your parents owed taxes.
The IRS can also come after you if you indirectly received government benefits (such as social security payments) that were paid to your parents’ accounts, but because they passed away, you received the benefits.
If your parents pass away and they were collecting social security or other government benefits, make sure to notify the payer of their death and send back the payments that were intended for your parents.
Before you are side-swept by an IRS official knocking on your door, make sure to have a conversation with your parents about their current financial situation and whether they owe any taxes to the IRS.
Can creditors go after beneficiaries?
Typically speaking, your parents’ creditors (the people who loaned money to your parents) cannot go after you.
Although your parents’ creditors may not be able to go after your inheritance directly, the courts could issue a judgment requiring you to pay the creditors from a portion (or all in some cases) of the inherited assets.
However, a court will typically only issue such a judgment if you inherit real estate with a mortgage, for example.
Can you Inherit Debt from your Spouse?
Depending on the state you live in, you may not be responsible to pay off your spouse’s debts.
However, if you and your spouse do hold joint accounts (such as joint credit cards or joint mortgages) then the debt that your spouse owes will be passed along to you.
Below are some additional reasons when you may inherit your spouse’s debt:
- You are a co-signor on a loan
- You are a joint credit card account holder
- Your state’s laws require you to pay your spouse’s debt
Make sure that you notify your spouse’s lenders of your spouse’s death.
If your spouse does pass away and you believe your spouse held debt, it would be helpful to talk to your accountant, financial advisor and/or attorney to discuss the best next steps for your personal situation.
How to Protect yourself from Inheriting Debt
Are you wondering how you can protect yourself from potentially inheriting debt from your parents – or from your spouse if they pass away unexpectedly?
First, you should evaluate your situation to determine whether you may need to take action today to protect yourself and your family from inheriting debt.
I’ve listed a few scenarios below that you should consider for your parents:
- You are your parents’ only heir
- You find your parents are in debt
- You find your parents struggle to pay off their debt
- Your parents are still reasonably healthy and young (age 50 to mid 60’s)
Below are a few scenarios that you should consider for your spouse:
- You partially or completely rely on your spouse’s income to pay bills
- You find that you and your spouse have difficulty paying off that debt
- You know your spouse has taken on excessive debt (e.g. credit card debt)
If you find yourself in any of these situations above – for your parents or for your spouse – then it might be time to consider life insurance.
Life insurance is a tool you can use to protect yourself from inheriting debt by:
- Paying for the life insurance coverage
- Buying life insurance on your parents and/or your spouse’s life
- Using the tax-free death life insurance benefit to pay for any inherited debt
- Buying coverage equal to or a little greater than the debts your parents and/or your spouse carry
You can obtain some of the best insurance coverage through Policygenius.
Policygenius offers many types of insurance, 2 of which are term life and whole life insurance.
Term life insurance is the:
…Form of life insurance there is.
However, term life insurance only covers a specific term (typically from 10 years to 30 years) of the insured’s life.
In other words, if your parents and/or your spouse outlive the term, you don’t get a single reward.
That’s why there is also an insurance product known as whole life insurance which spans for the entire lifespan of the insured.
The downside to whole life? It’s very expensive.
Here’s why you should consider Policygenius as your go-to insurance company (even for yourself!):
- It’s extremely easy to use
- They are very transparent with their offered insurance products
- The insurance recommendations are customized to your situation
- Policygenius wants to educate young professionals about life insurance
If you are ready to consider using insurance as a way to protect yourself and your family from potentially inheriting debt – I would suggest to start today.
Don’t wait, because then you could be too late.
As you can see, in the majority of cases, you typically cannot inherit debt from your parents.
Generally speaking, you may inherit debt if:
- You are a co-signor
- You are a joint debt owner
- You live in specific states with certain laws
- Your parents have certain outstanding medical bills
So, in most cases, you will not have to worry about inheriting debt from your parents – however, that doesn’t mean simply ignore their financial situation and carry on as is.
I’ll share what I do with my parents:
- Semi-annually we have a family meeting
- We review our family finances together
- We openly talk about money
Talking about money isn’t always a pleasant situation.
However, if you have elderly parents and haven’t had the “money talk” with them yet, I would suggest doing it now rather than later.
Trust me, I saw my parents go through massive amounts of stress when they were trying to figure out how to process their recently deceased parents’ estates (my grandparents, who left behind no will, and never talked about money).
Have the talk today so you are prepared for tomorrow.
Have you talked to your parents about their debt situation?